« April 2009 | Main | June 2009 »

Sunday, May 31, 2009

"Alpha Markets"

Robert Frank says Charles Darwin provides the "true intellectual foundation" for economics, and that his account of "the complex relationship between individual and social interest" is the key to understanding the financial crisis:

Alpha markets, by Robert H. Frank, Commentary, CIF:  Though Adam Smith is almost universally regarded as the father of modern economics, most economists will eventually see Charles Darwin's ideas as the true intellectual foundation of our discipline. Smith's modern disciples celebrate his invisible hand theory, which says markets harness individual self-­interest to serve society's interests. Smith himself was more circumspect, claiming only that self-interested actions often lead to socially benign outcomes. But that claim is remarkable enough. Competition among greedy producers often yields innovations that result in cheaper and better products for everyone.

It was Darwin, however, who better grasped the complex relationship between individual and social interest. And we must turn to his account if we are to understand the recent meltdown in financial markets. His deep insight was that natural selection favours traits and behaviours according to their effect on individual organisms, not groups. Sometimes individual and group interests coincide. But interests at the two levels often conflict.

Male body mass is a case in point. Most vertebrate species are polygynous, meaning that males take more than one mate if they can. The qualifier is important, because when some take multiple mates, others get none. The latter don't pass their genes along, making them the ultimate losers in Darwinian terms. So it is no surprise that males often battle furiously for access to mates. Size matters in those battles. And hence the evolutionary arms races that produce larger males.

Bull elephant seals often weigh more than five times as much as females. But their size is a handicap, making them far more vulnerable to sharks and other predators. Given an opportunity to vote on a proposal to reduce their weight by half, bulls would have every reason to favour it. But they have no such opportunity. And any bull that weighed much less than others would never find a mate.

Similar conflicts arise when individual rewards depend on relative performance. This payoff structure, common in financial markets, helps explain why those markets sometimes fail catastrophically. Wealth managers' salaries depend primarily on how well their investments perform in relative terms. Funds offering higher returns immediately attract cash from rival funds. If the invisible hand functioned as Alan Greenspan and other modern disciples of Adam Smith imagined, there would be no problem. Investors would be fully compensated for any additional risk they took in search of higher returns. But human brains forged by natural selection don't work as assumed in economics textbooks.

As our brains were evolving, immediate threats to survival loomed everywhere. Natural selection thus favoured a nervous system keenly sensitive to immediate relative payoffs, much less so to distant ones. Anyone disinclined to seize immediate gains at the risk of having to incur costs in the future would experience low relative rewards in the short run. And when competition was intense and immediate, such individuals often didn't survive to see the long run.

In market settings, a nervous system biased in favour of short-term relative reward is a recipe for disaster. When the price of an asset like housing is rising steadily, unregulated wealth managers can create leveraged investments that generate enormous rates of return. Even in the early years of this decade, many experienced analysts were warning that several mortgage-backed securities were poised to tumble. But investors faced a tough choice: they could earn high returns by continuing to invest in them, or they could move their money elsewhere. Many rejected the latter strategy because it would have required watching friends and neighbours pass them by.

Wealth managers felt compelled to offer the risky investments, since many customers would otherwise desert them. Managers also knew there would be safety in numbers when things soured, since almost everyone had been following the same strategy. The resulting collapse was inevitable.

Adam Smith's invisible hand is a truly extraordinary insight. But when rewards depend on relative performance, it doesn't always deliver.

The financial meltdown that caught Adam Smith's disciples off guard would not have surprised Darwin. One of his central themes was that because much of life is graded on the curve, wasteful arms races create conflict between individual and social interests. The good news is that unlike other animal species, humans can often resolve such conflicts through intelligent regulation.

Also see Paul Krugman's: What Economists Can Learn from Evolutionary Theorists Synopsis.

    Posted by on Sunday, May 31, 2009 at 05:14 PM in Economics, Financial System | Permalink  TrackBack (0)  Comments (13)


    "Incarceration as a Labor Market Outcome"

    John Quiggin makes a good point:

    Incarceration as a labor market outcome, by John Quiggin: I wasn’t all that surprised that Bryan Caplan didn’t like my interpretation of our bet on EU and US unemployment rates, which was that the combined rates of unemployment and incarceration in the US would exceed those in the EU over the next ten years. I was, however, surprised by the vehemence with which libertarian-inclined* commenters here and at Crooked Timber objected to this interpretation.

    A string of them echoed Caplan’s argument that

    From a labor market perspective, though, Quiggin’s incarceration adjustment would only make sense if you thought that most or all of the people in jail would be unemployed if they were released.

    Caplan has missed my main point. I’m not suggesting that incarceration is disguised unemployment (though obviously it reduces measured unemployment). Rather, I’m saying that, like unemployment, incarceration should be regarded as a (bad) labor market outcome. If you want to evaluate the performance of the labor market, you need to look at both.

    There’s nothing radical or leftist about this viewpoint: it’s one that is at least implicit in all economic models of the labor market of which I’m aware, and is most particularly explicit in that of the Chicago School*. Most of the crimes for which people are imprisoned in the US can be understood as reflecting economic choices which in turn are determined primarily by the labor market in which those choices are made. This is obviously true of property crime and drug dealing, and it’s true, directly or indirectly, of lots of violent crime as well. As Gary Becker put it (quoting from memory here) “a burglar is a burglar for the same reasons as I am a professor”. ...

    Continue reading ""Incarceration as a Labor Market Outcome"" »

      Posted by on Sunday, May 31, 2009 at 10:19 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (9)


      A Lump of Coal for Obama

      More disappointment with the new leader:

      Obama walks a fine line over mining, by Tom Hamburger and Peter Wallsten, LA Times: With the election of President Obama, environmentalists had expected to see the end of the "Appalachian apocalypse," their name for exposing coal deposits by blowing the tops off whole mountains.

      But in recent weeks, the administration has quietly made a decision to open the way for at least two dozen more mountaintop removals. ... The list included some controversial mountaintop mines. ...

      The administration's decision ... sheds on relations between the mining industry and the Obama White House,... environmentalists ... say they feel betrayed...

      The issue is politically sensitive because environmentalists were an active force behind Obama's election, and the president's standing is tenuous among Democratic voters in coal states. ... Moreover,... halting mountaintop mining could eliminate jobs and put upward pressure on energy prices in a time of economic hardship.

      Coal advocates have solicited help from officials as high up as White House Chief of Staff Rahm Emanuel. And the issue has sparked contentious debates within the administration, including one shouting match...

      Although environmentalists had expected the new administration to put the brakes on mountaintop removal, Rahall and other mining advocates have pointed out that Obama did not promise to end the practice and was more open to it than his Republican opponent, Arizona Sen. John McCain.

      A review of Obama's campaign statements show that he had expressed concern about the practice without promising to end it. ... And his EPA administrator, Lisa Jackson, has said that the agency ... would "use the best science and follow the letter of the law in ensuring we are protecting our environment." Soon afterward, the agency in effect blocked six major pending mountaintop removal projects...

      But this month, after a series of White House meetings with coal companies and advocates..., the EPA released the little-noticed letter giving the green light to at least two dozen projects. ...

      Ed Hopkins, a top Sierra Club official, said some of the projects that have now obtained the EPA's blessing "are ... large and potentially destructive..." "It makes us wonder what standards -- if any -- the administration is using," Hopkins said. ...

      Environmentalists were stunned to learn from Rahall's office May 15 that the EPA had given its blessing to 42 out of the 48 mine projects it had reviewed so far -- including two dozen mountaintop removals.

      The news came in a letter ... from ... the EPA's acting assistant administrator, who wrote, "I understand the importance of coal mining in Appalachia for jobs, the economy, and meeting the nation's energy needs."

        Posted by on Sunday, May 31, 2009 at 09:12 AM in Economics, Environment, Policy, Politics, Regulation | Permalink  TrackBack (0)  Comments (14)


        Carbon Offsets

        Robert Frank argues for carbon offsets as a complement to carbon taxes or cap-and-trade:

        Carbon Offsets: A Small Price to Pay for Efficiency, by Robert H. Frank, Commentary, NY Times: Are carbon offsets a good thing? They are intended to reduce the environmental impact of consumption. Traveling by plane, for example, causes carbon dioxide to be emitted into the atmosphere, so travelers can pay a specialist to offset those emissions some other way — perhaps by planting vegetation or installing renewable-energy technologies. It all sounds reasonable.

        Yet carbon offsets have drawn sharp criticism, even ridicule. ... But the criticism is misguided. If our goal is to reduce carbon emissions as efficiently as possible, offsets make perfect economic sense.

        Consider the decision of whether to buy a hybrid car. ... Many people drive so little that they wouldn’t save enough on gasoline to recoup the higher cost. Yet many such people buy hybrids anyway, because they think they are helping the environment. Well and good, but they could help even more by buying a standard car and using the savings to buy carbon offsets. ...

        Of course, carbon offsets alone won’t eliminate global warming. People also need stronger incentives to take into account the environmental consequences of their actions.

        President Obama has proposed attacking the problem with a carbon cap-and-trade system. ... This approach was first used in the United States to address acid rain... Compared with more traditional regulatory measures, the auction method substantially reduced the cost of achieving the law’s air-quality target.

        As people learn more about such an approach, they seem less likely to oppose it. ... A carbon cap-and-trade system is functionally similar to a carbon tax. ... Carbon offsets are no substitute for the stronger incentives inherent in carbon taxes or cap-and-trade, but they can reinforce their effects. Both carbon taxes and permit auctions would also generate revenue that could be used to buy additional carbon offsets. ... Carbon offsets, though much maligned, are an excellent idea. If you want to help reduce carbon emissions, consider buying some.

          Posted by on Sunday, May 31, 2009 at 01:37 AM in Economics, Environment, Policy, Regulation | Permalink  TrackBack (0)  Comments (13)


          links for 2009-05-31

            Posted by on Sunday, May 31, 2009 at 12:02 AM in Economics, Links | Permalink  TrackBack (0)  Comments (8)


            Saturday, May 30, 2009

            "The Fall of the Mall"

            Compares sales in the first quarter of 2009 to the same quarter in 2008. "The deeper the red, the steeper the loss."

              Posted by on Saturday, May 30, 2009 at 07:10 PM in Economics | Permalink  TrackBack (0)  Comments (5)


              Reich: The Future of Manufacturing

              Robert Reich:

              The Future of Manufacturing, GM, and American Workers (Part I), by Robert Reich: What's the Administration's specific aim in bailing out GM? ... Even if the U.S. were to seal its borders and bar any manufactured goods from coming in from abroad--something I don't recommend--we'd still be losing manufacturing jobs. That's mainly because of technology.

              When we think of manufacturing jobs, we tend to imagine old-time assembly lines populated by millions of blue-collar workers who had well-paying jobs with good benefits. But that picture no longer describes most manufacturing. I recently toured a U.S. factory containing two employees and 400 computerized robots. The two live people sat in front of computer screens and instructed the robots. In a few years this factory won't have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots. ...

              What happened to manufacturing? In two words, higher productivity. As productivity rises, employment falls because fewer people are needed. In this, manufacturing is following the same trend as agriculture. ... America can generate far larger crops than a century ago with far fewer people. New technologies ... have ... made farming much more productive.

              Manufacturing is analogous. ... Since 1995, even as manufacturing employment has dropped around the world, global industrial output has risen more than 30%.

              We should stop pining after the days when millions of Americans stood along assembly lines and continuously bolted, fit, soldered or clamped what went by. Those days are over. And stop blaming poor nations whose workers get very low wages. Of course their wages are low; these nations are poor. ... When America blocks their exports by erecting tariffs and subsidizing our domestic industries, we prevent them from doing better. ...

              Want to blame something? Blame new knowledge. Knowledge created the electronic gadgets and software that can now do almost any routine task. This goes well beyond the factory floor. America also used to have lots of elevator operators, telephone operators, bank tellers and service-station attendants. Remember? Most have been replaced by technology. Supermarket check-out clerks are being replaced by automatic scanners. The Internet has taken over the routine tasks of travel agents, real estate brokers, stock brokers and even accountants. With digitization and high-speed data networks a lot of back office work can now be done more cheaply abroad.

              Any job that's even slightly routine is disappearing from the U.S. But this doesn't mean we are left with fewer jobs. It means only that we have fewer routine jobs... Technophobes, neo-Luddites and anti-globalists be warned: You're on the wrong side of history. You see only the loss of old jobs. You're overlooking all the new ones.

              The reason they're so easy to overlook is that so much of the new value added is invisible. A growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering. Or for high-level sales, marketing and advertising. They're composers, writers and producers. They're lawyers, journalists, doctors and management consultants. I call this "symbolic analytic" work because most of it has to do with analyzing, manipulating and communicating through numbers, shapes, words, ideas.

              Symbolic-analytic work can't be directly touched or held in your hands, as goods that come out of factories can be. In fact, many of these tasks are officially classified as services rather than manufacturing. Yet almost whatever consumers buy these days, they're paying more for these sorts of tasks than for the physical material or its assemblage. ...

              The biggest challenge we face over the long term -- beyond the current depression -- isn't how to bring manufacturing back. It's how to improve the earnings of America's expanding army of low-wage workers who are doing personal service jobs in hotels, hospitals, big-box retail stores, restaurant chains, and all the other businesses that need bodies but not high skills. More on that to come.

              Yes, it isn't the jobs that are lost to technology that are of concern, it's the jobs we create to replace them, the speed at which those jobs are created, and how those jobs are distributed (both within and across countries). Even though the value of what has been created with the resources that have been freed by technology has exceeded the value of what has been lost, the distribution of those benefits has been very unequal.

                Posted by on Saturday, May 30, 2009 at 02:43 PM Permalink  TrackBack (0)  Comments (80)


                "Redistribution, Height Taxes, and Utilitiarianism"

                I don't think I'll comment on any of the underlying philosophical issues:

                Mankiw, Redistribution, Height Taxes, and Utilitiarianism, by Mathew Yglesias: Via a distraught Conor Clarke, I see that not only did Greg Mankiw once write a cheeky paper arguing that maybe we should impose a height tax, he also goes in for some odd philosophical claims. To try to reconstruct his argument, he believes:

                1. The main arguments in favor of redistributive taxation are grounded in utilitarianism.
                2. Utilitarian theory supports taxing tall people more heavily than short people (this is the thesis of the paper).
                3. Therefore, people should either sign on for the height tax or else abandon their support for redistribution.

                He concludes with this:

                A moral and political philosophy is not like a smorgasbord, where you get to pick and choose the offerings you like and leave the others behind without explanation. It is more like your mother telling you to clean everything on your plate. If you are a Utilitarian redistributionist, the height tax is like that awful tasting vegetable your mother served up because it is good for you. No matter how hard you might wish it wasn’t there sitting on your plate, it just won’t go away.

                I think there are a ton of mistakes being made here. This goes back to a point I was making a while ago about how dangerous it is that the public discourse is so dominated by low-quality freelance philosophy done by people with PhDs in economics. I’m fairly certain that if Mankiw were to walk over to Emerson Hall he could find some folks ... who could explain to him that there’s little grounds for the belief that a commitment to utilitarianism is the main justification for redistributive taxation.

                So point one is factually wrong.

                But that aside, I think the “smorgasboard” argument is a confused way of thinking about moral reasoning. A great many crucially important questions in normative ethics are easy. Is it okay to murder Greg Mankiw to steal the money in his pocket? No, it isn’t. But a lot of foundational questions in ethical theory are hard. And a lot of meta-ethical questions are hard. ... There’s a certain hyper-literal sense in which these questions all form a hierarchy. First I must decide where I stand on meta-ethics. Am I a reductive moral realist? A quasi-realist? A practical reasons theorist? An old-school “moral facts are facts too, damnit” moral realist? Are there theological issues in play? Then I need to decide if I’m a utilitarian (and if so, what kind of utilitarian!) or maybe some other kind of consequentialist or maybe I have a more Kantian view. So then depending on those answers, I can say “killing Greg Mankiw to steal the money in his pocket is wrong because…” and then lay the whole thing out.

                I think what Mankiw is implying with the “smorgasboard” argument is that this is how people should actually engage in moral reasoning. ... Maybe killing Greg Mankiw really is okay? And if I’m not uncertain, if I say “the reason it’s wrong to kill Greg Mankiw and steal his money is that the murder would reduce net utility” then the murderer can counter with “well, if you believe in utilitarianism, you ought to believe in a height tax.” Then I say “well that sounds wrong!” And then, having debunked utilitarianism, Mankiw gets shot and everyone agrees that justice has been done.

                Something’s gone wrong there. We don’t abandon considered convictions about normative issues that quickly. Murder is wrong. If forced to contemplate the alleged contradiction, there are a bunch of things we might want to consider. Maybe the analysis of the height issue has gotten something wrong, utility-wise. After all, though the paper is clever, it’s hardly a comprehensive review of all of the hedonic issues in play. Or maybe utilitarianism isn’t the best theoretical grounding for the conviction that murder is wrong. Or, maybe the height tax thing actually is a good idea, albeit an unrealistic one. ...

                  Posted by on Saturday, May 30, 2009 at 11:11 AM in Economics, Taxes | Permalink  TrackBack (0)  Comments (12)


                  George Bush and Bill Clinton Love Fest

                  What's the deal with this?:

                  Bush-Clinton Policy Talk Strikes a Congenial Tone, by Jim Rutenberg, NY Times: Former President Bill Clinton really misses the presidency. ... Former President George W. Bush hardly misses it at all....

                  But that was practically where the differences stopped as the two former presidents appeared for the first time on a stage together to discuss national and international policy. Each earned more than an estimated $150,000 for the appearance. ...

                  And as they settled into overstuffed chairs, Mr. Bush and Mr. Clinton became something of an ex-presidents’ support group, avoiding direct critiques of each other, or, for that matter, their future club member, President Obama...

                  When Mr. Clinton said one of his biggest regrets was the lack of United States action during the mass killings in Rwanda, saying “I have no defense,” Mr. Bush responded, “I think you’re being a little tough on yourself.” He added that Mr. Clinton’s lament that he should have sent troops ignored the fact that such deployments are not so simply done.

                  When Mr. Bush ... defended his policy toward the Darfur region of Sudan, Mr. Clinton got his back, in return. “I think he did about all he could do,” he said. ...

                  If there was anything that even bordered on a sharp exchange, it was the discussion over Iraq.

                  Mr. Clinton said he would have preferred for Mr. Bush to have given weapons inspectors more time in Iraq before invading and, in the meantime, “concentrated on Afghanistan.”

                  Mr. Bush said, with a hint of irritation, “I don’t buy the premise that our attention was distracted,” a rejection of the argument that the Iraq war came at the expense of progress in Afghanistan. ...

                  Afterward, even audience ... expressed surprise at the level of congeniality. ...

                    Posted by on Saturday, May 30, 2009 at 01:35 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (16)


                    links for 2009-05-30

                      Posted by on Saturday, May 30, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (7)


                      Friday, May 29, 2009

                      "Liberaltarians"

                      In my heart of hearts, I'm pretty libertarian. I really don't want government looking over my shoulder and telling me what I can and cannot do.

                      Where I part with many libertarians - perhaps due to my background - is in the idea that government is almost always at odds with liberty. In my case, government played a key role in providing me with opportunity - education is one example, without tuition of $100 per semester at a state school, I probably would not have gone to college - but the opportunities government provided me go beyond education (and also see the examples given in the article for women and minorities).

                      Governments also need to intervene to prevent monopoly and political power from building up. Without such interventions, power will tend to concentrate and we will likely be exploited in one way or another, so government needs to ensure that our opportunity to enter a particular business - that our economic opportunities generally - are not limited by these factors.

                      I'm doing this in a bit of a rush (during a seminar, but don't tell), so one more quick point. I was very disappointed in the silence from many libertarians when the Bush administration was taking away, one by one, many of the liberties we enjoy. It was hard not to conclude that for many, the label of libertarian is simply an excuse to be concerned with little more than their own pocketbook.

                      In any case, I agree with much of what Bruce Bartlett has to say:

                      Liberaltarians?, by Bruce Bartlett, Commentary, Forbes: I recently attended a dinner with a group of prominent liberal and libertarian bloggers to see if there is a community of interest that might lead to closer cooperation on some issues.

                      On the surface, there would appear to be potential for an alliance. Libertarians tend to be liberal on social issues, favoring such things as gay marriage and drug legalization; and also liberal on defense and foreign policy, opposing the wars in Iraq and Afghanistan, and opposing torture and restrictions on civil liberties in the name of national security.

                      But libertarians are conservative on economic policy--favoring a free market with virtually no government intervention except the enforcement of contracts, and no government spending or taxes except those to pay for a very minimal police force and military.

                      Libertarians' views on social policy and national defense make them sympathetic to the Democrats, while their views on economic policy tend to align them with the Republicans. If one views social, defense and economic policy as having roughly equal weight, it would seem, therefore, that most libertarians should be Democrats. In fact, almost none are. Those that don't belong to the dysfunctional Libertarian Party are, by and large, Republicans.

                      The reason for this is that most self-described libertarians are primarily motivated by economics. In particular, they don't like paying taxes. They also tend to have an obsession with gold and a distrust of paper money. As a philosophy, their libertarianism doesn't extent much beyond not wanting to pay taxes, being paid in gold and being able to keep all the guns they want. Many are survivalists at heart and would be perfectly content to live in complete isolation on a mountain somewhere, neither taking anything from society nor giving anything.

                      An example of this type of libertarian thinking can be found on the Web site of a group called the Campaign for Liberty. It pays lip service to the libertarian philosophy on foreign and social policy, but says little about them. The discussion of economic policy, however, is much greater. But its only major proposal is abolition of the income tax. No ideas on how government spending would be cut to make this possible are put forward except to eliminate the congressional pay raise. Perhaps this group really believes that will be enough to abolish the income tax, but I suspect not. Whoever wrote these talking points is simply pandering to the stupid, the ignorant and the unsophisticated.

                      One is not likely to run into that type of libertarian at a Washington dinner party. These libertarians tend to be well-educated, arriving at his or her philosophy through reading obscure books or random contact with some libertarian in graduate school. They don't own guns--probably never even fired one, don't mind paying taxes too much, have no particular nostalgia for the gold standard and certainly would not choose to live in isolation on a mountaintop. They are cosmopolitan, urbane, articulate and interested in ideas more than just about anything else. They are not especially career-oriented--they are happy to be paid less than they probably could make as long as they don't have to compromise their principles and can do work that advances the cause. For the most part, they aren't family-oriented or religious, and they mostly fit the stereotype of a nerd.

                      But even these metro-libertarians tend to be more concerned about economics than social or foreign policy. The Cato Institute publishes an annual survey of economic freedom throughout the world, but produces no surveys of what countries have the most political or social freedom or those that have the most libertarian foreign policy.

                      Continue reading ""Liberaltarians"" »

                        Posted by on Friday, May 29, 2009 at 11:59 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (78)


                        Paul Krugman: The Big Inflation Scare

                        Money sitting in banks doing nothing but providing insurance is not inflationary, and worries that rising government debt will force policymakers to generate inflation are unfounded:

                        The Big Inflation Scare, by Paul Krugman, Commentary, NY Times: Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason...

                        But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics...

                        First.... It’s important to realize that there’s no hint of inflationary pressures in the economy right now. ... Deflation ... is the ... present danger.

                        So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

                        The first story is just wrong. The second could be right, but isn’t.

                        Now, it’s true that the Fed has ... been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

                        But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

                        Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan ... purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell. ...

                        Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt...

                        Such things have happened in the past. ... But ... modern examples are lacking. Over the past two decades, Belgium, Canada and ... Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

                        So is there any reason to think that inflation is coming? Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens. I... made a similar case for Japan in the 1990s. But the case for inflation never made headway ... then, and there’s no sign it’s getting traction with U.S. policy makers now.

                        All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

                        Well,... it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

                        Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

                        Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.

                          Posted by on Friday, May 29, 2009 at 01:52 AM in Economics, Inflation, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (105)


                          Fed Watch: A Return to a Nasty Dynamic?

                          Tim Duy:

                          A Return to a Nasty External Dynamic?, by Tim Duy: At the moment, the economic dynamic is exceedingly complicated. An understatement, I fear. The crosscurrents in the data and the markets are treacherous, and I suspect will have Fed officials scratching their heads. Hold steady with existing plans? Step up the liquidity provisions? More actively engage plans to tighten policy? The latter option seems almost inconceivable; for the moment, the debate will focus on the issue of further easing. At this point, I think the Fed will sit tight, allowing further easing to come from the already active TALF program, rather than expanding outright purchases of Treasuries.

                          The core issue is the steep rise in Treasury yields, which apparently were kept in check only by the expectation that the Fed would continued to gobble up the endless stream of securities issues by the US Treasury. The Fed sank that hypothesis at the last FOMC meeting, and a subsequent statement by Federal Reserve Chairman Ben Bernanke made clear that the Fed does not have a 3% target on 10 year Treasury yields. Since then, yields have climbed as high as 3.75% before prices rebounded today, bringing yields down to 3.61%. Should we be concerned with the gains?

                          Brad DeLong argued a few weeks ago that the Fed's reluctance to cap rates was a policy error in the making. Indeed, it would seem that rising yields are toxic for debt heavy balance sheets, especially where housing is concerned. Officials repeatedly point to the importance of supporting housing prices, a policy that would be undermined as rising Treasury yields boost mortgage rates higher. And while we have seen some stability in recent months in existing homes sales - of which foreclosures and distressed sales are no small part - the recent Case-Shiller data makes clear that housing markets remains under severe pricing pressure:

                          Home prices in 20 major metropolitan areas fell in March more than forecast as foreclosures surged, threatening to extend the housing slump.

                          The S&P/Case-Shiller home-price index decreased 18.7 percent from March 2008, matching the drop in the year ended in February. The measure declined 19 percent in January, the most since data began in 2001.

                          In contrast is the view that rising yields signal an unambiguously positive environment in future months, a sentiment echoed by US Treasury Secretary Timothy Geithner:

                          Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

                          Likewise, Alan Blinder is confused by thoughts that the Fed would attempt to control yields at all:

                          Blinder said he’s “more dubious” about the Treasury purchases themselves. Any reduction in long-term rates makes it more difficult for U.S. banks to generate earnings to make up for what the Fed estimated earlier this month would be $600 billion in losses under adverse economic conditions. “It makes it harder for them to earn their way out,” he said.

                          So we are stuck with two apparently contrasting views. On one hand, rising long rates and the related steepening of the yield curve should indicate improving economic conditions - after all, rising yields simply imply that market participants are gaining confidence to put their money to work in more risky endeavors. The steeper yield curve should boost bank earnings and, in time, encourage lending. On the other hand, higher yields may undermine support for the housing market, thus extending the downturn. The Wall Street Journal believes the Fed is choosing the positive spin:

                          Federal Reserve officials believe the recent sharp rise in yields on U.S. Treasury bonds could reflect a mending economy and a receding risk of financial catastrophe, suggesting the central bank won't rush to react -- even though some investors see danger in the government's rising cost of borrowing.

                          The WSJ is most likely correct. Indeed, I too want to believe the first story; the steep yield curve should be a clear signal that economic activity is poised to soar. Two things are holding me back. First, the 10-2 spread went positive in mid-2007, which should have indicated that the expected Fed easing later that year would catch fire and the economy would be clear of recession territory by mid-2008. Oops - the signal was premature. Something was different (just as I had come to embrace the yield curve's signals). My second concern is that rising yields indicate capital is fleeing the US, and the shape of the yield curve is being influenced significantly by shifts in patterns of foreign central bank purchases. And while the resulting depreciation of the Dollar will support US growth over time, the transition can be very disruptive. Interestingly, the Wall Street Journal story quoted above does not point to this possibility.

                          Continue reading "Fed Watch: A Return to a Nasty Dynamic?" »

                            Posted by on Friday, May 29, 2009 at 01:37 AM in Economics, Fed Watch, Monetary Policy | Permalink  TrackBack (0)  Comments (12)


                            "Moyo's Confused Attack on Aid for Africa"

                            More "Mud-Wrestling on African Aid":

                            Moyo's confused attack on aid for Africa, by Jeffrey Sachs, voxeu.org: Ms. Dambisa Moyo's recent Huffington Post article exposes the confusions that underlie her slashing attacks on aid. Most importantly, she seems to believe that sub-Saharan Africa was economically prosperous and then was pushed into poverty by aid. She makes the following statement: "No surprise, then, that Africa is on the whole worse off today than it was 40 years ago. For example in the 1970's less than 10% of Africa's population lived in dire poverty -- today over 70% of sub-Saharan Africa lives on less than US$2 a day."

                            Let's parse that statement for a moment. World Bank researchers Shaohua Chen and Martin Ravallion (2007) prepare the benchmark under-$2-a-day historical headcount data going back to 1981. According to their figures, headcount poverty under $2 a day was 74% of the population in sub-Saharan Africa in 1981 and 73% in 2005. Other prominent estimates that go back to 1950 or 1970 also contradict Moyo's statement, by showing high and persistent poverty. All of the macroeconomic time series by Maddison (1995), Summers and Heston (1988), and others tell the same story; the majority of Africa's population started out impoverished at the time of national independence in the 1960s and 1970s, and a majority remains impoverished till today.

                            Continue reading ""Moyo's Confused Attack on Aid for Africa"" »

                              Posted by on Friday, May 29, 2009 at 12:21 AM in Development, Environment | Permalink  TrackBack (0)  Comments (24)


                              links for 2009-05-29

                                Posted by on Friday, May 29, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (14)


                                Thursday, May 28, 2009

                                "Fermi Problems"

                                My oral exam was a bit different from this:

                                Fermi problems, by Steve Hsu: Princeton University Press sent me a copy of Guesstimation: Solving the World's Problems on the Back of a Cocktail Napkin, by professors Lawrence Weinstein and John A. Adam. The book is a compendium of Fermi problems -- that is, problems which are simply stated and whose answers can be estimated at the order of magnitude level through simple logic from a few factual inputs.

                                The classic Fermi problem is: How many piano tuners are there in Chicago?

                                When I took my oral exam as a first year graduate student at Berkeley, theoretician Geoff Chew (a former student of Fermi's) asked me:

                                Continue reading ""Fermi Problems"" »

                                  Posted by on Thursday, May 28, 2009 at 10:36 AM in Economics | Permalink  TrackBack (0)  Comments (33)


                                  "Housing Starts, Remittances and Macroeconomic Developments"

                                  Federico Mandelman of the Atlanta Fed:

                                  Housing starts, remittances and macroeconomic developments, by Federico Mandelman: Recent evidence collected by the Dallas Fed's Pia Orrenius suggests that apprehensions of undocumented workers attempting to cross the U.S.–Mexican border are a good predictor of the overall American job market. Simply put, if one wanted to predict job market conditions in July of a given year, one should examine immigrant apprehensions in January. Orrenius finds that more immigrants attempt to cross the border from Mexico (and more of them are caught doing so) when immigrants believe the U.S. economy would offer more jobs in the near future.

                                  One area of the economy that relied heavily on immigrant labor was housing. The following chart plots monthly U.S. housing starts (lagged five months) and remittances to Mexico. ... I use remittances as a proxy for migrant Mexican labor.

                                  Continue reading ""Housing Starts, Remittances and Macroeconomic Developments"" »

                                    Posted by on Thursday, May 28, 2009 at 09:57 AM in Economics, Immigration, Unemployment | Permalink  TrackBack (0)  Comments (7)


                                    "Crazy Compensation and the Crisis"

                                    Alan Blinder urges "corporate boards of directors and, in particular, of their compensation committees" to create compensation plans for financial firms that discourage excessive risk taking:

                                    Crazy Compensation and the Crisis, by Alan Blinder, Commentary, WSJ: Despite the vast outpouring of commentary and outrage over the financial crisis, one of its most fundamental causes has received surprisingly little attention. I refer to the perverse incentives built into the compensation plans of many financial firms, incentives that encourage excessive risk-taking with OPM -- Other People's Money.

                                    What, you say, hasn't huge attention been paid to executive compensation...? Yes. But the ruckus has been over the generous levels of compensation,... not over the dysfunctional incentives...

                                    Take a typical trader at a bank, investment bank, hedge fund or whatever. ... Unfortunately, their compensation schemes ... offer.. them the following sort of go-for-broke incentives when they place financial bets: Heads, you become richer than Croesus; tails, you get no bonus, receive instead about four times the national average salary, and may (or may not) have to look for a new job. ...

                                    [L]et's consider the incentives facing the CEO and other top executives... For them, it's often: Heads, you become richer than Croesus ever imagined; tails, you receive a golden parachute that still leaves you richer than Croesus. So they want to flip those big coins, too.

                                    From the point of view of the companies' shareholders -- the people who provide the OPM -- this is madness. ... Traders and managers both want to flip more coins -- and at higher stakes -- than shareholders would if they had any control, which they don't.

                                    The source of the problem is really quite simple: Give smart people go-for-broke incentives and they will go for broke. Duh.

                                    Amazingly, despite the devastating losses, these perverse pay incentives remain the rule on Wall Street today, though exceptions are growing. ... These wacky compensation schemes have puzzled me for nearly 20 years. ... But the issue could be considered an intellectual puzzle until the bottom fell out. ... after an orgy of irresponsible risk taking... [T]he consequences for the real economy have been devastating. ...

                                    What to do? It is tempting to conclude that the U.S. (and other) governments should regulate compensation practices.... But the ... executives, lawyers and accountants who design compensation systems are imaginative, skilled and definitely not disinterested. Congress and government bureaucrats won't beat them at this game.

                                    Rather, fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees. These boards, ... are supposed to represent the interests of stockholders, not those of managers. ... The unhappy (but common) combination of coziness and drowsiness in corporate boardrooms must end. ... For example, top executives could be paid mainly in restricted stock that vests at a later date, and traders could have their winnings deposited into an account from which subsequent losses would be deducted.

                                    Comprehensive reform of the financial system will probably take years. The problems are many and complex, and the government's to-do list is not only long but also a political minefield. Yet fixing compensation incentives does not require any government action. It can be done by financial companies, tomorrow. Too bad they didn't do it yesterday.

                                    But how is the board of directors chosen? See also:

                                    The SEC's Proxy Access Proposal, by Lucian Bebchuk: The Securities and Exchange Commission voted last week to ask the public to comment on a proposal to let shareholders place director candidates on the corporate ballot. The adoption of such a rule would be a useful step toward the necessary reform of corporate elections. ...

                                      Posted by on Thursday, May 28, 2009 at 01:47 AM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (21)


                                      "The Cost Conundrum"

                                      Why are health care costs in McAllen, Texas twice as much as costs in El Paso County even though they have similar demographics?:

                                      The Cost Conundrum, by Atul Gawande, The New Yorker: ...McAllen, Texas ... is one of the most expensive health-care markets in the country. ... El Paso County, eight hundred miles up the border, has essentially the same demographics. ... Yet in 2006 Medicare expenditures (our best approximation of over-all spending patterns) in El Paso were ... half as much as in McAllen. ...

                                        Posted by on Thursday, May 28, 2009 at 01:00 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (50)


                                        links for 2009-05-28

                                          Posted by on Thursday, May 28, 2009 at 12:02 AM in Economics, Links | Permalink  TrackBack (0)  Comments (36)


                                          Wednesday, May 27, 2009

                                          Bill Clinton: I Should Have Raised More Hell About Derivatives Being Unregulated

                                          Bill Clinton gives, to use David Leonhardt's term, an "impressively honest" analysis of his role in bringing about the financial crisis, particularly the failure to adequately regulate derivative markets:

                                          Bill Clinton, on His Economic Legacy, by David Leonhardt: Given the range of issues Peter Baker covers in his article about Bill Clinton for the coming New York Times Magazine, there was not room for anything close to Mr. Clinton’s entire comments on his economic record. ... So we’re going to post, below, the transcript of that portion of the discussion between Mr. Clinton and Mr. Baker. ...

                                          NEW YORK TIMES: Speaking of banks and toxic assets... You know that Time magazine named you and said you should have done this, that or the other thing. What do you say to that? Is there anything you would have done differently? ...

                                          Mr. CLINTON: Now, there basically have been three charges,... one, because I enforced the Community Reinvestment Act for the first time and over 90 percent of all lending done under that law was done when I was president, $300 billion, that part of that was a lot of little banks made loans to people they had no business making loans to to buy houses so they could check the box for the Community Reinvestment Act. That’s the right-wing argument.

                                          Then there’s the argument from the left that I shouldn’t have signed the bill that got rid of the Glass-Steagall law because that enabled banks and investment banks in effect to merge their functions.

                                          And then there’s the argument that I make, which is that I should have raised more hell about derivatives being unregulated. I believe the last one is by far the most valid … although I don’t think that the Congress would have permitted anything to be done because Alan Greenspan was against it.

                                          So let’s take them in reverse order. The argument against regulating derivatives, which Greenspan urged — and this is one of the few things I think — I think Bob Rubin and Larry Summers and those guys have gotten a little bit of a bum rap on this lately...

                                          But I do believe on the derivatives they made the argument, the people who were against regulating it, that people like you weren’t buying derivatives. It wasn’t like you were investing your 401(k) in derivatives. You were investing your 401(k) in mutual funds, which were subject at least under normal times to the jurisdiction of the S.E.C., which was supposed to be minding the store. And so because we had a hostile Republican Congress which threatened not to fund ... the S.E.C. because of what Arthur Levitt was doing to try to protect the American economy from meltdowns. They said, “Oh, he’s interfering with a free market” and all that. This is what he’s supposed to do.

                                          They argued that nobody’s going to buy these derivatives, we’ll do it without transparency, they’ll get the information they need. And it turned out to be just wrong; it just wasn’t true. ... That rested on a lot of assumptions, including the fact that the ratings agencies would do a good job, which didn’t happen, in evaluating risk. So I very much wish now that I had demanded that we put derivatives under the jurisdiction of the Securities and Exchange Commission and that transparency rules had been observed... That I think is a legitimate criticism of what we didn’t do.

                                          On the Glass-Steagall, I’ve really thought about that because No. 1, nonbank banking was already a major part of American life at that time. Letting banks take investment positions I don’t think had much to do with this meltdown. And the more diversified institutions in general were better able to handle what happened. ...

                                          I believe if you look at the blurring of the lines which already existed before that bill was signed — the bill arguably gave us a framework, at least, for which this process, which was happening anyway, could be regulated. So I don’t think that’s such a good criticism.

                                          I think actually, if you want to make a criticism on that, it would be an indirect one; you could say that the signing of that legislation sped up what was happening anyway and maybe led some of these institutions to be bigger than they otherwise would have been and the very bigness of some of these groups caused some of this problem...

                                          And the first argument, I think it’s totally without merit. If you look at the community banks in this country — actually I never believed I’d cite her as an authority, but Arianna Huffington had a great piece on the success of community banks yesterday in the Huffington Post. You ought to get it —

                                          NEW YORK TIMES: Do you read the Huffington Post?

                                          Mr. CLINTON: A lot. I read a lot of the blogs. ...

                                          That’s my take on it. The Time magazine thing,... if you actually read what they said, they kind of hedged. They said “Well, here are some of the things people say.” But if you ask me to write the indictment, I’d say, “I wish Bill Clinton had said more about derivatives. The Republicans probably would have stopped him from doing it but at least he should have sounded the alarm bell.” ...

                                          But you got to understand, again, we were living in a different world. We had a lot of confidence in the S.E.C. We had a lot of confidence in the broad-based nature of our economic growth. We never dreamed there’d be a time like in the first five years of this decade where literally the whole growth of the country would be in the housing, finance and consumer spending because we had no other investment strategy. ...

                                          I made the best call I could. But I do wish — I always felt a little queasy about the derivative issue. Otherwise, I think we did a good job and I do not believe — when anybody asks me that, I ask them, I look at them and ask them, “Do you think this would have happened if we had been there? Look me in the face and say yes.” I haven’t found any takers yet.

                                          That's the part I'm not so sure about. If a Clinton clone had been in charge rather than Bush, would this have still happened? I can't be sure, of course, and maybe the clone administration would have stepped in before things got out of hand, but little cues like the deference to Greenspan he indicates above (who would have opposed trying to prick the bubble if he had admitted a bubble was inflating) makes me wonder. So I think it probably would have happened anyway.

                                          But, and this is important, perhaps the Treasury wouldn't have dragged its feet for months and months only to turn the problem over to the next administration if there had been more continuity, and I believe that acting faster to solve the toxic asset problem could have made a big difference in limiting the severity of the resulting downturn. In addition, without Republicans standing in the way with veto power, the shape of the initial and subsequent stimulus packages would have been different as well. So while I'm not so sure that the outcome would have been different in terms of the bubble, I do believe the response would have been quite a bit different, and much better than what actually occurred.

                                            Posted by on Wednesday, May 27, 2009 at 02:03 PM in Economics, Financial System, Politics | Permalink  TrackBack (0)  Comments (38)


                                            US and European Employment Rates

                                            How do employment rates in the US compare to those in Europe?:

                                            How does the U.S. labor market compare now?, Lane Kenworthy: In a new CEPR report, John Schmitt, Hye Jin Rho, and Shawn Fremstad note that while the U.S. unemployment rate had been lower than those of many rich European countries in the 1980s and 1990s, it now has caught up to and surpassed most of them. In March of this year our unemployment rate was tied for fourth-highest among the major OECD nations. This, they say, “has turned the case for the U.S. model almost entirely on its head.” ... I’m sympathetic to the conclusion, but I’d prefer it to be based on a different measure of labor market performance. ...

                                            If our interest is in an economy’s success in creating jobs, a better indicator for cross-country comparison is the employment rate: the share of working-age people (age 15 to 64 is the standard) that are employed. The following chart shows employment rates for the two most recent business-cycle peak years: 2000 and 2007. The U.S. is one of just a few nations in which the employment rate declined during this period, though it’s in the middle of the pack rather than at the bottom.

                                            ...The American labor market hasn’t been the worst at creating and maintaining jobs in the 2000s (though bear in mind that we’re talking here solely about the number of jobs, not their quality). Yet as Schmitt, Rho, and Fremstad rightly suggest, things have changed sharply relative to the 1980s and 1990s when our performance was near the top of the comparative heap.

                                              Posted by on Wednesday, May 27, 2009 at 01:33 AM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (62)


                                              "Mud-Wrestling on African Aid"

                                              Jeff Sachs:

                                              Aid Ironies: The debate about foreign aid has become farcical. The big opponents of aid today are Dambisa Moyo, an African-born economist who reportedly received scholarships so that she could go to Harvard and Oxford but sees nothing wrong with denying $10 in aid to an African child for an anti-malaria bed net. Her colleague in opposing aid, Bill Easterly, received large-scale government support from the National Science Foundation for his own graduate training. I certainly don't begrudge any of them the help that they got. Far from it. I believe in this kind of help. And I'd find Moyo's views cruel and mistaken even she did not get the scholarships that have been reported...

                                              Bill Easterly responds:

                                              Sachs Ironies: Why Critics are Better for Foreign Aid than Apologists: Official foreign aid agencies delivering aid to Africa are used to operating with nobody holding them accountable for aid dollars actually reaching poor people. Now that establishment is running scared with the emergence of independent African voices critical of aid, such as that of Dambisa Moyo. Jeffrey Sachs, the world's leading apologist and fund-raiser for the aid establishment, has responded here with a ferocious personal attack on Moyo and myself, "Aid Ironies." Allow me to defend myself (I'll let the formidable Moyo handle herself). It's not so much my pathetic need to correct slanders, as if anybody cared. Sachs' desperation shows when he peddles what I will show he knew were falsehoods. Besides, the sight of two middle-aged white men mud-wrestling on African aid may entertain the audience. ...

                                              Dambisa Moyo:

                                              Aid Ironies: A Response to Jeffrey Sachs: Ahead of the publication of my book Dead Aid, an author friend of mine cautioned me about responding to opponents who found it necessary to color their criticism with personal attacks. This, he argued, is a tried and tested way of side-stepping the issues and providing a smoke screen when faced with a valid argument. Jeffrey Sachs's latest posting is just the latest example of using this tactic to obfuscate the facts and avoid addressing the fundamental issues regarding aid's manifest failure to deliver on its promise of generating growth and alleviating poverty in Africa. And though I am responding here in order to refute his arguments, as a fellow economist, I intend to rely on logic and evidence to make my argument and show Mr. Sachs the professional courtesy that he has failed to show to me. ...

                                              And, again from Bill Easterly:

                                              Am I attacking Sachs too much?: ...Let me respond to those concerned about the tone and divisiveness of this debate (and a little bit about my levity). ...

                                              First, in the intellectual world as in the legal one, the accused has a right to face his accusers and mount a proper defense.

                                              Second, the purpose of debate is to facilitate the emergence of the best ideas and to shoot down the worst ideas. I'm not always so cocksure I am right, but it is clear to me intellectually that Sachs' ideas are wrong, and I will combat them accordingly. An artificial consensus that stops the process of shooting down bad ideas is not a healthy intellectual practice. Sachs himself seems to keep trying to shut down the debate. ...

                                              Finally, about my occasional levity. I believe in the maxim I heard long ago: "Take your work seriously and yourself lightly." The levity is because I don't take myself too seriously (if I ever do, please let me know). I take the work very seriously indeed. ...

                                                Posted by on Wednesday, May 27, 2009 at 01:19 AM in Development, Economics | Permalink  TrackBack (0)  Comments (29)


                                                links for 2009-05-27

                                                  Posted by on Wednesday, May 27, 2009 at 12:03 AM in Economics, Links | Permalink  TrackBack (0)  Comments (11)


                                                  Tuesday, May 26, 2009

                                                  Feldstein: Has the US Recovery Begun?

                                                  Martin Feldstein says don't get your hopes up for the economy just yet:

                                                  Has the US Recovery Begun?, by Martin Feldstein, Commentary, Project Syndicate: ...[M]y reading of the evidence does not agree with that of those who claim that ... a sustained cyclical recovery is likely to begin within the next few months. ... But, although the recent news is not as encouraging as some have claimed, I expect that the next few months will see some real improvements that will reduce the rate of overall economic decline, or even produce a temporary rise in the GDP growth rate, owing to the Obama administration’s fiscal stimulus measures. ...

                                                  But the key thing to bear in mind is that the stimulus effect is a one-time rise in the level of activity, not an ongoing change in the rate of growth..., there is nothing to make that higher growth rate continue in the following quarters. So, by the end of the year, we will see a slightly improved level of GDP, but the rate of GDP growth is likely to return to negative territory.

                                                  The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.

                                                  Having said that, these policies are still works in progress. If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010. If not, we will just have to keep waiting and hoping. [...more...]

                                                    Posted by on Tuesday, May 26, 2009 at 05:13 PM in Economics | Permalink  TrackBack (0)  Comments (7)


                                                    Starve the Beast (Recession Edition)

                                                    John Taylor plays Starve the Beast. First, he calls for permanent tax cuts - and only permanent tax cuts - to stimulate the economy, tax cuts that will make the long-run budget picture worse. (Paul Krugman: "You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems.") Then, he tells a "scary" inflation story and argues that deficits are a bigger threat than the financial crisis and must be reduced through reductions in the size of government:

                                                    Exploding debt threatens America, by John Taylor, Commentary, Financial Times: ...Under President Barack Obama’s budget plan, the federal debt is ... is rising – and will continue to rise – much faster than ... America’s ability to service it. ...

                                                    I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers..., a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

                                                    Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. ... A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. ...

                                                    The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. ... And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. ... This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating. ...

                                                    The time for ... excuses is over. ... Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis. The problem is that policy is getting worse not better. ...[G]overnment is now the most serious source of systemic risk. ...

                                                      Posted by on Tuesday, May 26, 2009 at 04:21 PM in Economics, Fiscal Policy, Taxes | Permalink  TrackBack (0)  Comments (25)


                                                      "Credit Crisis Cassandra"

                                                      This explains a lot. Brooksley Born, head of the Commodity Futures Trading Commission from 1996-1999, wanted to regulate the financial markets that have caused us so much trouble, but Greenspan, Rubin, Summers, and Levitt stood in the way and would not allow it. I wonder if they patted her on the head as they explained "that they understood finance better than she did."

                                                      I have argued that the attitudes toward regulation were the biggest problem in creating this crisis, and this article reinforces that view. The people in charge of the regulatory agencies were convinced that unregulated markets were self-correcting, and that regulation was not needed and would more likely do harm than good. As this shows, no amount of convincing from people who weren't as smart as the smartest guys in the room was going to change that. The question for me is whether those in charge now, Summers for example, have learned their lesson and the humility to be derived from it, or whether they will be defensive of their own role to the extent that it affects the type of regulation they can support. I'd very much like to believe they have learned their lesson, though humility seems to be lacking, but watching Summers and others argue that the private sector and the market is preferable to temporary government takeover of banks (i.e. his and the administration's opposition to temporary nationalization),  - the continued faith that the market always knows best - makes me wonder if they have.

                                                      One more note on Summers. I wasn't in favor of him when he was picked to be part of the administration because I thought he carried far too much political baggage. If he has value, it is not as a spokesperson for the administration. But again and again I heard that he was the only one smart enough to do this job. I don't believe that and never will, but if it's true, fine, put him in an office somewhere, let him be smart and helpful, but above all keep him out of the public eye. He does not help as a spokesman for the administration, he hurts the cause every time he opens his mouth. At first it seemed like he was going to be the key spokesperson on financial matters and as I said, I thought that was a mistake. But lately I haven't heard much from him, most of his work appears to be behind the scenes, and as far as I'm concerned, that's a very good development in terms of the public presentation of the administration's views:

                                                      Credit Crisis Cassandra, by Manuel Roig-Franzia, Washington Post: Friends ... want Brooksley Born to say four words, four simple words: "I told you so." Ah, but she won't... Not even in a quiet moment in her living room, giving her first interview with a major news organization...

                                                      A little more than a decade ago, Born foresaw a financial cataclysm, accurately predicting that exotic investments known as over-the-counter derivatives could play a crucial role in a crisis much like the one now convulsing America. Her efforts to stop that from happening ran afoul of some of the most influential men in Washington, men with names like Greenspan and Levitt and Rubin and Summers...

                                                       [F]rom 1996 to 1999, when Born was the chairman of the Commodity Futures Trading Commission, the U.S. economy was roaring and she was getting nowhere with predictions of doom. ... She woke repeatedly "in a cold sweat," agonizing that a financial calamity was coming, she recalled one recent afternoon. "I was really terribly worried," she said.

                                                      Before taking office, Born had been a high-octane attorney... But ... she... was taking on Beltway pros... She marched into congressional hearing after congressional hearing -- pin neat, always with a handbag -- but no one really wanted to listen.

                                                      The Wall Street Journal declared that "the nation's top financial regulators wish Brooksley Born would just shut up." The Bond Buyer newspaper compared her to a salmon "swimming against raging currents." ... Now ... she ... may be closer than ever to vindication...

                                                      Born's baptism as a new agency head in 1996 came in the form of an invitation. Federal Reserve Chairman Alan Greenspan ... wanted her to come over for lunch.

                                                      Greenspan had an unusual take on market fraud, Born recounted: "He explained there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him."

                                                      This made no sense to her. She'd spent much of the 1980s defending clients caught up in a vast conspiracy by two wealthy brothers, Nelson and William Hunt, who duped investors while trying to corner the world silver market. "After all," Born said, looking back, "I'm a lawyer, and I think the existence of fraud prohibitions is critically important."

                                                      But Greenspan was insistent, she said. Finally, he said, "Well, Brooksley, I guess you and I will never agree about fraud." ...

                                                      That was just the beginning. By early 1998, Born had also tangled with Treasury Secretary Robert Rubin, his deputy, Summers, and Securities and Exchange Commission head Arthur Levitt, not to mention members of Congress, financial industry heavyweights and business columnists. She wanted to release a "concept paper" -- essentially a set of questions -- that explored whether there should be regulation of over-the-counter derivatives. ...

                                                      They warned that if she did so, the market would implode and predicted tidal waves of lawsuits. On top of that, Rubin told her, she didn't have legal authority to regulate the derivatives anyway. She wasn't buying any of it, and she wasn't backing down. ...

                                                      Based on her lunch with Greenspan, Born knew she would run into heavy resistance. ... In early 1998, Born's plan to release her concept paper was turning into a showdown. Financial industry executives howled, streaming into her office to try to talk her out of it. Summers, then the deputy Treasury secretary, mounted a campaign against it, CFTC officials recalled. ...

                                                      In one call, Summers said, "I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II," recounted Greenberger, a University of Maryland law school professor who was Born's director of the Division of Trading and Markets. ...

                                                      The discordant notes crescendoed in April 1998 during a tension-filled meeting of the President's Working Group, a gathering of top financial regulators that periodically met behind closed doors at the Treasury Department. At that meeting, Greenspan and Rubin forcefully opposed Born's plans, Waldman said. "Greenspan was saying we shouldn't do it," Waldman recalled. "Rubin was saying we couldn't do it."

                                                      The next month, Born released her concept paper anyway. Within weeks, she was under attack. ... Greenspan, Rubin and Levitt jointly urged Congress to pass a moratorium on the CFTC regulating over-the-counter derivatives.

                                                      With emotions running high, Born was summoned to the office of House Banking Chairman Jim Leach, a Republican from Iowa, to meet with top officials from the Fed and the Treasury. ...

                                                      "The feelings in the room were very tense," recalled Leach... "There were some very profound personality clashes between Rubin and [Born], and Greenspan and her," Leach said. "They felt, I think, that they understood finance better than she did." ...

                                                      "If you could fault her for anything, it's not recognizing the politics," Waldman said. "She assumed the force of her ideas were going to be sufficient."

                                                      But then, in September 1998, a huge hedge fund that had bet heavily on derivatives -- Long-Term Capital Management -- nearly failed and had to be bailed out by a group of banks. Here was a living example of Born's prophecy. Even Leach, who supported the moratorium on CFTC regulatory action, introduced Born at a hearing by saying, "You're welcome to claim some vindication, if you want."

                                                      Born responded: "I certainly will not do so." But she went on to tell the committee that the Long-Term Capital debacle "should serve as a wake-up call about the unknown risks in the over-the-counter derivatives market."

                                                      No one woke up. That same month, Congress passed the moratorium. Born says they were "muzzling an independent agency." Two months later, Born announced that she would not seek reappointment to a second term. ...

                                                      Last week,... she traveled to Boston to receive the John F. Kennedy Profiles in Courage award. Finally, though perhaps too late, everyone wanted to listen to Brooksley Born. She once again warned about the danger of Dark Markets... "If we fail now to take the remedial steps needed to close the regulatory gap," Born said, "we will be haunted by our failure for years to come." ...

                                                        Posted by on Tuesday, May 26, 2009 at 10:29 AM in Economics, Politics, Regulation | Permalink  TrackBack (0)  Comments (60)


                                                        Comment Troubles?

                                                        A couple of people have reported that their comments are being rejected by the TypePad system. I have no idea why -- they are not being tagged as spam so I cannot restore them -- all I can recommend for now is to keep trying (some people send the rejected comments to me by email, and that will work if there aren't too many, but I won't always be able to post them right away).  I am looking into this. [I should probably add that not every missing comment is TypePad's doing...]

                                                          Posted by on Tuesday, May 26, 2009 at 10:26 AM in Weblogs | Permalink  TrackBack (0)  Comments (4)


                                                          links for 2009-05-26

                                                            Posted by on Tuesday, May 26, 2009 at 12:19 AM in Economics, Links | Permalink  TrackBack (0)  Comments (8)


                                                            Monday, May 25, 2009

                                                            "Auctions and Politicians"

                                                            David Warsh explains why "companies reflexively oppose auctions" of public property such as forests or the airwaves:  properly designed auctions can prevent government giveaways to the rich and powerful:

                                                            Auctions and Politicians, by David Warsh, Economic Principals: Last September, when Treasury Secretary Henry Paulson first described to a startled world his $700 billion plan to deal with the emerging financial crisis, it was with these words:  “And we’ll use – you know, we’re working through the processes, but there will be some form of auction process.”

                                                            Eight months later, the first auctions of those toxic assets are still a month away – assuming the Public Private Investment Plan ... gets off the ground on schedule. Even now, its success is not assured.

                                                            Unmistakable, however, is the centrality of auction technology to the twenty-first century – indeed, of economic engineering in general. Newly-created markets resting on “some form of auction process” can be found for commodities of all sorts these days, from electricity and advertising to carbon emission and radio-spectrum rights.

                                                            That such new machinery might be equal to the task was anything but obvious fifteen years ago when Federal Communications Commission Chairman Reed Hundt boldly presided over the first successful modern high-tech auction, designed to carve up the emergent national market for broadband personal communication services. Congress had only required that he sell the relevant frequencies, rather than give them away. ...

                                                            The auction was a smashing success, and not just because it raised a lot of money for the government. Its bigger pay-off was the way it offered a complicated industry a way to begin working on the same page.  Its design protocols quickly became the template for many other auctions in many other industries. And before long, it was clear that new tools were regularly being added, not just auction techniques, but clearinghouse techniques that addressed various market failures. Yet as recently as 2002, when Harvard University professor Alvin Roth wrote “The Economist As Engineer,” there was still something novel about the proposition that economic engineering was becoming close kin to chemical engineering or medicine.

                                                            Not any more! Auction technology has blossomed around the world, and called into existence a whole new industry, replete with firms, entrepreneurs, consultants, counter-consultants and even a few gunslingers. ...

                                                            That’s because auction technology has become a feature of life on the World Wide Web so familiar that it is scarcely noticed that competitive bidding determines what you see every single time you make a search, or call up a page that displays advertising.  For a while, that was the province of the warriors who wrote the big engines’ code. Today, however, big-name economists advise all the top firms: Harvard’s Susan Athey is Microsoft’s chief economist, Berkeley’s Hal Varian is chief economist for Google, Caltech’s Preston McAfee leads a group at Yahoo. Lawrence Ausubel, of the University of Maryland, is helping ICANN, the Internet’s governing body, organize an auction of new top-level domain names. (Roth’s Game Theory, Experimental Economics and Market Design Page is a cornucopia of information on developments and emerging trends.)

                                                            Continue reading ""Auctions and Politicians"" »

                                                              Posted by on Monday, May 25, 2009 at 02:15 PM in Economics | Permalink  TrackBack (0)  Comments (10)


                                                              Is Colin Powell the Answer?

                                                              Bruce Bartlett:

                                                              Colin Powell: Republican, by Bruce Bartlett: Yesterday, Colin Powell restated his continued membership in the Republican Party. But he didn’t really explain why. It seemed more like an act of defiance than a statement of fact—no one is going to tell him what part of the bus he can sit in and no one is going to tell him what political party he can be a member of. That’s fine, but if Powell is going to make a point of staying in a party that doesn’t particularly want him—former Vice President Dick Cheney has more or less told him to leave—then Powell has a responsibility to do more than give the occasional television interview criticizing the GOP’s lack of inclusiveness; he needs to engage it on a systematic basis.

                                                              Powell has to accept that he is in a unique position to command attention and lead the Republican Party—or at least that part of it that isn’t consumed with defending the indefensible on torture or living in a fantasy world where the economy would be booming today if it just wasn’t for Obama’s budget deficits.

                                                              Continue reading "Is Colin Powell the Answer?" »

                                                                Posted by on Monday, May 25, 2009 at 11:27 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (27)


                                                                Paul Krugman: State of Paralysis

                                                                Will California be a trend setter once again?:

                                                                State of Paralysis, by Paul Krugman, Commentary, NY Times: California, it has long been claimed, is where the future happens first. But is that still true? If it is, God help America.

                                                                The recession has hit the Golden State hard. The housing bubble was bigger there than almost anywhere else, and the bust has been bigger too. ... What’s really alarming about California, however, is the political system’s inability to rise to the occasion.

                                                                Despite the economic slump,... California has immense human and financial resources. It should not be in fiscal crisis; it should not be on the verge of cutting essential public services and denying health coverage to almost a million children. But it is...

                                                                The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13... Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.

                                                                The result was a tax system that is both inequitable and unstable. ... Even more important, however, Proposition 13 made it extremely hard to raise taxes, even in emergencies: no state tax rate may be increased without a two-thirds majority in both houses of the State Legislature. And this provision has interacted disastrously with state political trends.

                                                                For California, where the Republicans began their transformation from the party of Eisenhower to the party of Reagan, is also the place where they began their next transformation, into the party of Rush Limbaugh. As the political tide has turned against California Republicans, the party’s remaining members have become ever more extreme, ever less interested in the actual business of governing.

                                                                And while the party’s growing extremism condemns it to seemingly permanent minority status ... the Republican rump retains enough seats in the Legislature to block any responsible action in the face of the fiscal crisis.

                                                                Will the same thing happen to the nation as a whole? ... America’s projected deficits may sound large, yet it would take only a modest tax increase to cover the expected rise in interest payments — and right now American taxes are well below those in most other wealthy countries. The fiscal consequences of the current crisis, in other words, should be manageable.

                                                                But that presumes that we’ll be able, as a political matter, to act responsibly. The example of California shows that this is by no means guaranteed. And the political problems that have plagued California for years are now increasingly apparent at a national level.

                                                                To be blunt: recent events suggest that the Republican Party has been driven mad by lack of power. The few remaining moderates have been defeated, have fled, or are being driven out. What’s left is a party whose national committee has just passed a resolution solemnly declaring that Democrats are “dedicated to restructuring American society along socialist ideals,” and released a video comparing Speaker of the House Nancy Pelosi to Pussy Galore.

                                                                And that party still has 40 senators.

                                                                So will America follow California into ungovernability? Well, California has some special weaknesses that aren’t shared by the federal government. In particular, tax increases at the federal level don’t require a two-thirds majority, and can in some cases bypass the filibuster. So acting responsibly should be easier in Washington than in Sacramento.

                                                                But the California precedent still has me rattled. Who would have thought that America’s largest state, a state whose economy is larger than that of all but a few nations, could so easily become a banana republic?

                                                                On the other hand, the problems that plague California politics apply at the national level too.

                                                                Update:

                                                                Oops — column notice: Alert readers may notice that the last sentence of today’s column doesn’t seem to make sense in context. That’s because it’s not supposed to be there; it’s a fossil from an earlier draft. My fault — I was filing from a remote location in a very different time zone, and didn’t check properly. Urp.

                                                                  Posted by on Monday, May 25, 2009 at 01:07 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (44)


                                                                  Global Imbalances and Future Crises

                                                                  I've been trying to figure out how much danger there is of a sudden unwinding of global imbalances that could extend and potentially deepen the recession. I've been worried there is a chance this could happen, but Barry Eichengreen explains that there are "two hopes for avoiding this disastrous outcome":

                                                                  Fix global imbalances to avert future crises, by Barry Eichengreen, Commentary, Project Syndicate: Future history books, depending on where they are written, will take one of two approaches to assigning blame for the world’s current financial and economic crisis.

                                                                  One approach will blame lax regulation, accommodating monetary policy, and inadequate savings in the US. The other, already being pushed by former and current US officials like Alan Greenspan and Ben Bernanke, will blame the immense pool of liquidity generated by high-savings countries in East Asia and the Middle East. All that liquidity, they will argue, had to go somewhere. Its logical destination was the country with the deepest financial markets, the US, where it raised asset prices to unsustainable heights.

                                                                  Note the one thing on which members of both camps agree: the global savings imbalance – low savings in the US and high savings in Chinaand other emerging markets – played a key role in the crisis... Preventing future crises similar to this one therefore requires resolving the problem of global imbalances. ...

                                                                  Whether there is a permanent reduction in global imbalances will depend mainly on decisions taken outside the US, specifically in countries like China. One’s forecast of those decisions hinges, in turn, on why these other countries came to run such large surpluses in the first place.

                                                                  One view is that their surpluses were a corollary of the policies favouring export-led growth that worked so well for so long. China’s leaders are understandably reluctant to abandon a tried-and-true model. They can’t restructure their economy instantaneously. ... They need time to build a social safety net capable of encouraging Chinese households to reduce their precautionary saving. If this view is correct, we can expect to see global imbalances re-emerge once the recession is over and to unwind only slowly thereafter.

                                                                  The other view is that China contributed to global imbalances not through its merchandise exports, but through its capital exports. What China lacked was not demand for consumption goods, but a supply of high-quality financial assets. It found these in the US, mainly in the form  of Treasury and other government-backed securities, in turn pushing other investors into more speculative investments.

                                                                  Recent events have not enhanced the stature of the US as a supplier of high-quality assets. And China, for its part, will continue to develop its financial markets and its capacity to generate high-quality financial assets internally. But doing so will take time. Meanwhile, the US still has the most liquid financial markets in the world. This interpretation again implies the re-emergence of global imbalances once the recession ends, and their very gradual unwinding thereafter.

                                                                  One development that could change this forecast is if China comes to view investing in US financial assets as a money-losing proposition. US budget deficits as far as the eye can see might excite fear of losses on US Treasury bonds. A de facto policy of inflating away the debt might stoke such fears further. At that point, China would pull the plug, the dollar would crash, and the Fed would be forced to raise interest rates, plunging the US back into recession.

                                                                  There are two hopes for avoiding this disastrous outcome. One is relying on Chinese goodwill to stabilise the US and world economies. The other is for the Obama administration and the Fed to provide details about how they will eliminate the budget deficit and avoid inflation once the recession ends. The second option is clearly preferable. After all, it is always better to control one’s own fate.

                                                                    Posted by on Monday, May 25, 2009 at 12:47 AM in Budget Deficit, China, Economics, Inflation, International Finance | Permalink  TrackBack (0)  Comments (21)


                                                                    links for 2009-05-25

                                                                      Posted by on Monday, May 25, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (4)


                                                                      Sunday, May 24, 2009

                                                                      Geithner Interview

                                                                      Geithner Dismisses GOP Socialism Charge as 'Ridiculous', Federal Eye: Treasury Secretary Timothy Geithner admits private investors are worried about investing in new government-backed commercial mortgage securities and dismisses as "ridiculous" a recent Republican National Committee resolution stating that Democratic policies bordered on socialism. ...

                                                                      Update: Calculated Risk comments on Geithner's remarks:

                                                                      Although there were many factors in the housing and credit bubble, the two keys were: 1) rapid innovation in the mortgage industry (securitization, automated underwriting, rapidly expanded wholesale lending, etc), and 2) a complete lack of oversight by regulators. ... Geithner failed to mention the rapid changes in lending and the failure of government oversight as the two critical causes of the bubble. Either Geithner misspoke or he still doesn't understand what happened - and that is deeply troubling.

                                                                        Posted by on Sunday, May 24, 2009 at 02:45 PM in Economics, Financial System, Video | Permalink  TrackBack (0)  Comments (9)


                                                                        Funding Universal Health Care

                                                                        Robert Reich says that since other alternatives to fund health care have been closed off, it's time for Obama to consider taxing employer provided health benefits:

                                                                        The Only Sure Way to Fund Universal Health Care, by Robert Reich: During the presidential campaign,... Obama ... criticized John McCain for proposing to tax all employer-provided health benefits. ... I worried that Obama would come to regret the position he took.

                                                                        Half a year later, it appears that the President will need to tax employer provided health benefits in order to finance universal health care. Or at least the tax-free benefits now enjoyed by higher-income employees. Many in Congress and in the White House are convinced it’s the only good option. ...

                                                                        The White House is in a revenue bind. The President had intended to raise money for health care by limiting the income tax deductions that wealthy taxpayers can claim. This would have generated ... about half of Obama’s proposed “health care reserve fund.” But the proposal ran into a buzz saw of opposition from congressional Democrats. ...

                                                                        With deficit vultures already circling, Obama has to come up with a far more reliable way to fund health care. That’s where employee health benefits come in. According to the Congressional Budget Office, taxing all employee health benefits would yield a whopping $246 billion every year. Even limiting the tax to higher-income employees would go a long way to funding universal health care. Employer-provided health insurance is the biggest tax break in the whole federal income tax system.

                                                                        Tax-free employer-provided health care is also, in effect, the government-backed health insurance system we now have. ... Seventy percent of the 253 million Americans with health insurance receive at least some of it through their employers. ...

                                                                        But, face it, it’s become a crazy system. You’re not eligible for these benefits when you and your family are likely to need them most – when you lose your job and your income plummets. And these days, as we’re witnessing, no job is safe. The system also distorts the labor market. It prevents lots of people from changing jobs for fear they’ll lose their health insurance, or won’t get the benefits they do now. And it invites employers to game the system by seeking young, healthy employees who pose low risks of ill health and will therefore keep insurance costs low... The system also encourages employers to try to push married employees onto their spouse's health insurance plan so that the spouse’s employer bears the cost.

                                                                        It’s also an upside-down system. The biggest share of the $246 billion goes to upper-income people. ... Few people collecting $12 an hour at fast-food restaurants or big-box retailers see any part of the $246 billion. The higher your pay, the more health coverage you receive, and the bigger chunk of the $246 billion you get. Top executives and their families get gold-plated plans...

                                                                        The good news is that a program providing universal health care doesn’t need the full $246 billion a year... Obama’s health care reserve fund needs around $650 billion over ten years. So a sensible and politically feasible alternative is to limit tax-free employer-provided health benefits to workers whose incomes are under, say, $100,000 a year, and subject those with higher incomes to progressively higher taxes on them.

                                                                        It’s still not the position Obama took in the campaign. But, hey, circumstances change.

                                                                        The administration has signaled that this door is not closed, but it is not their first choice.

                                                                          Posted by on Sunday, May 24, 2009 at 11:10 AM in Economics, Health Care, Taxes | Permalink  TrackBack (0)  Comments (24)


                                                                          links for 2009-05-24

                                                                            Posted by on Sunday, May 24, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (19)


                                                                            Saturday, May 23, 2009

                                                                            "How to Help the Poor Have More Money?"

                                                                            Are there reasons to oppose this general approach to emergency aid beyond those noted below?:

                                                                            How to help the poor have more money? Well, you could give it to them, by Laura Freschi: In 2007, people in the Western Province of Zambia lost their homes, their livestock and their crops when heavier-than-normal flash floods swept through their area. USAID’s office of disaster assistance stepped in with $280,000 worth of with seeds and fertilizer, training for farmers, and emergency relief supplies.

                                                                            Two NGOs working in Zambia, Oxfam GB and Concern Worldwide, tried a different approach: they handed out envelopes stuffed with cash—from $25 to $50 per month per affected family, with no strings attached. An evaluation found that common fears about cash transfers—that the cash infusion will cause inflation in the market, that the money will be squandered, or that men will take control of the money—were unrealized.

                                                                            What did people buy with the money? The list includes maize, beans, salt, cooking oil, meat, vegetables, clothes and blankets, paraffin, transport, soap and body lotion, and lots of other mundane household items. They also loaned it to friends, used it to pay back debts, purchased health care, education and transport, and rebuilt their homes. Only a very small fraction of the money (less than .5%) was spent on “unproductive” items, like liquor for the men.

                                                                            Continue reading ""How to Help the Poor Have More Money?"" »

                                                                              Posted by on Saturday, May 23, 2009 at 10:30 PM in Development, Economics | Permalink  TrackBack (0)  Comments (9)


                                                                              Whats New in Econometrics: Time Series

                                                                              This won't interest many of you I don't think, but I didn't realize these lectures were available on Google Video so I thought I'd pass them along to anyone - like me - who is interested (if you click through to the Google Video page and select "original size" for viewing, the picture is a bit better):

                                                                              Continue reading "Whats New in Econometrics: Time Series" »

                                                                                Posted by on Saturday, May 23, 2009 at 05:31 PM in Economics, Methodology, Video | Permalink  TrackBack (0)  Comments (6)


                                                                                The Decline of Merit Pay in Journalism

                                                                                David Cay Johnston on the job market for journalists:

                                                                                Welcome to the Jungle, by David Cay Johnston, CJR: Reporter Dan Browning’s piece on coming newsroom cuts at the St. Paul Pioneer-Press contains a curious detail that perhaps will encourage rigorous thinking in articles covering compensation. “The company said it wants… the elimination of merit pay….” Browning wrote... The term “merit pay” usually means that management rewards superior performance with superior compensation. ...

                                                                                There is an adage among business owners ... that properly priced labor pays for itself. Workers whose pay equals their economic value-added receive just what they contribute and, in effect, cost the employer nothing. Those who are underpaid, however, damage profits through inefficiency, because when you underpay you attract less efficient workers. On the other end, those ... who are overpaid rob the owners of part of their profits.

                                                                                So what does it say that Pioneer Press ... wants to stop rewarding superior performance with appropriately superior pay?

                                                                                In theory, the best workers will go elsewhere. After all, the highest performers will be in demand and others will bid for their talent. The theory of market economics says that ... the quality of the labor ... will diminish, with appropriate damage to ... equity.

                                                                                Continue reading "The Decline of Merit Pay in Journalism" »

                                                                                  Posted by on Saturday, May 23, 2009 at 11:27 AM in Economics, Market Failure, Press, Unemployment | Permalink  TrackBack (0)  Comments (28)


                                                                                  links for 2009-05-23

                                                                                    Posted by on Saturday, May 23, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (14)


                                                                                    Friday, May 22, 2009

                                                                                    Sachs: Obama's Military Conundrum

                                                                                    The people who need to hear this advice from Jeff Sachs don't seem to be interested in listening:

                                                                                    Obama's military conundrum, by Jeffrey Sachs, Project Syndicate: American foreign policy has failed in recent years mainly because the US has relied on military force to address problems that demand development assistance and diplomacy. Young men become fighters in places such as Sudan, Somalia, Pakistan and Afghanistan because they lack gainful employment. Extreme ideologies influence people when they can't feed their families, and when lack of access to family planning leads to an unwanted population explosion. President Barack Obama has raised hopes for a new strategy, but so far the forces of continuity in US policy are dominating the forces of change. ...

                                                                                    The policy decisions of recent months offer little ... hope for a fundamental change in US foreign policy direction. While the US has signed an agreement with Iraq to leave by the end of 2011, there is talk in the Pentagon that US "non-combat" troops will remain in the country for years or decades to come. ...

                                                                                    Some opponents of the Iraq war, including me, believe that a fundamental – and deeply misguided – objective of the war from the outset has been to create a long-term military base (or bases) in Iraq, ostensibly to protect oil routes and oil concessions. As the examples of Iran and Saudi Arabia show, however, such a long-term ­presence sooner or later creates an explosive backlash.

                                                                                    The worries are even worse in Afghanistan and Pakistan.

                                                                                    Continue reading "Sachs: Obama's Military Conundrum" »

                                                                                      Posted by on Friday, May 22, 2009 at 01:45 PM in Economics, Iraq and Afghanistan, Terrorism | Permalink  TrackBack (0)  Comments (41)


                                                                                      The Party of Stale Ideas

                                                                                      Bruce Bartlett offers his cure for the Republican Party's problems:

                                                                                      Finding The Next Kemp, by Bruce Bartlett, Forbes: Perhaps the saddest part of attending the funeral for Jack Kemp on May 8 was the realization that he was the last of an era: a politician who really cared about ideas.

                                                                                      At the reception afterward, a few of the old-timers who were with Kemp back in the days when he was creating supply-side economics and bringing the Republican Party back from the brink of extinction got to talking. We all lamented that there just didn't seem to be any politician out there these days that we felt we could get behind.

                                                                                      The reason isn't that there aren't members of Congress who would like to be the next Kemp--one, certainly, is former Kemp staffer Rep. Paul Ryan of Wisconsin. The real problem is the culture of Washington politics, which has changed dramatically since the late 1970s when Kemp was at the pinnacle of his influence.

                                                                                      Continue reading "The Party of Stale Ideas" »

                                                                                        Posted by on Friday, May 22, 2009 at 09:36 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (47)


                                                                                        Paul Krugman: Blue Double Cross

                                                                                        How will Obama react to the duplicitous actions of the medical-industrial complex?:

                                                                                        Blue Double Cross, by Paul Krugman, Commentary, NY Times: That didn’t take long. Less than two weeks have passed since much of the medical-industrial complex made a big show of working with President Obama on health care reform — and the double-crossing is already well under way. ...

                                                                                        The story so far: on May 11 the White House called a news conference to announce that major players in health care ... had come together to support a national effort to control health care costs.

                                                                                        The fact sheet on the meeting, one has to say, was classic Obama in its message of post-partisanship and, um, hope. ... But just three days later the hospital association insisted that it had not, in fact, promised what the president said it had promised... And the head of the insurance lobby said that the idea was merely to “ramp up” savings, whatever that means.

                                                                                        Meanwhile, the insurance industry is busily lobbying Congress to block one crucial element of health care reform, the public option — that is, offering Americans the right to buy insurance directly from the government as well as from private insurance companies.

                                                                                        And at least some insurers are gearing up for a major smear campaign. ... The Washington Post reported that Blue Cross Blue Shield of North Carolina was preparing to run a series of ads attacking the public option. The planning for this ad campaign must have begun quite some time ago.

                                                                                        The Post has the storyboards for the ads, and they read just like the infamous Harry and Louise ads that helped kill health care reform in 1993. ... “We can do a lot better than a government-run health care system,” says ... one of the ads. To which the obvious response is, if that’s true, why don’t you? Why deny Americans the chance to reject government insurance if it’s really that bad?

                                                                                        For none of the reform proposals currently on the table would force people into a government-run insurance plan. At most they would offer Americans the choice of buying into such a plan.

                                                                                        And the goal of the insurers is to deny Americans that choice. They fear that many people would prefer a government plan to dealing with private insurance companies that, in the real world as opposed to the world of their ads, are more bureaucratic than any government agency, routinely deny clients their choice of doctor, and often refuse to pay for care.

                                                                                        Which brings us back to Mr. Obama.

                                                                                        Back during the Democratic primary campaign, Mr. Obama argued that the Clintons had failed in their 1993 attempt to reform health care because they had been insufficiently inclusive. He promised instead to gather all the stakeholders ... around a “big table.” And that May 11 event was, of course, intended precisely to show this big-table strategy in action.

                                                                                        But what if interest groups showed up at the big table, then blocked reform? Back then, Mr. Obama assured voters that he would get tough: “If those insurance companies and drug companies start trying to run ads with Harry and Louise, I’ll run my own ads as president. I’ll get on television and say ‘Harry and Louise are lying.’ ”

                                                                                        The question now is whether he really meant it.

                                                                                        The medical-industrial complex has called the president’s bluff. It polished its image by showing up at the big table and promising cooperation, then promptly went back to doing all it can to block real change. The insurers and the drug companies are, in effect, betting that Mr. Obama will be afraid to call them out on their duplicity.

                                                                                        It’s up to Mr. Obama to prove them wrong.

                                                                                          Posted by on Friday, May 22, 2009 at 12:40 AM in Economics, Health Care, Politics | Permalink  TrackBack (0)  Comments (73)


                                                                                          "Do Schools Make Inequality Worse?"

                                                                                          Lane Kenworthy:

                                                                                          Do schools make inequality worse?, by Lane Kenworthy: “Far from leaning against economic inequality, U.S. schools make it worse.” This sentiment, from a recent Clive Crook op-ed, expresses a view that’s commonplace on both the left and the right, and among both proponents and opponents of school reform.

                                                                                          It’s wrong. Americans do leave the schooling system more unequal in cognitive and noncognitive skills than when they enter it. Yet that inequality is less — probably much less — than it would be in the absence of schools. Schools don’t increase inequality; they just don’t do enough to overcome the inequality produced throughout childhood by differences in families, neighborhoods, peers, and other influences.

                                                                                          How do we know that? First, children are vastly unequal in ability when they enter the school system at age five or six. This is due partly to genetics and partly to environmental differences.

                                                                                          Second, we have evidence from the natural experiment that is summer vacation. During those three months out of school, the cognitive skills of children in lower socioeconomic status (SES) households tend to stall or actually regress. Kids in high-SES households fare much better during the summer, as they’re more likely to spend it engaged in stimulating activities. In his book Intelligence and How to Get It, cognitive psychologist Richard Nisbett concludes that “much, if not most, of the gap in academic achievement between lower- and higher-SES children, in fact, is due to the greater summer slump for lower-SES children” (p. 40).

                                                                                          Without schools this pattern would be magnified, and the gap in cognitive and noncognitive abilities at age 18 almost certainly would be much greater than it now is.

                                                                                          This by no means implies that our educational system is doing fine. It could and should do much better at helping children from disadvantaged environments. But saying it currently makes things worse suggests the situation is hopeless. Instead of promoting reform, that undercuts it.

                                                                                            Posted by on Friday, May 22, 2009 at 12:17 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (45)


                                                                                            links for 2009-05-22

                                                                                              Posted by on Friday, May 22, 2009 at 12:06 AM in Economics, Links | Permalink  TrackBack (0)  Comments (16)


                                                                                              Thursday, May 21, 2009

                                                                                              "Near Sighted Stress Tests"

                                                                                              Lucian Bebchuk argues that banks "could well be in much worse shape than has been suggested by the stress tests" because the tests only looked at losses through the end of 2010. Anticipated losses after that date, which could be big enough to matter, were not included:

                                                                                              Near-Sighted Stress Tests, by Lucian Bebchuk, Forbes: Buoyed by the results of the "stress tests" conducted by banks' supervisors, markets now appear optimistic about the capital positions of U.S. banks. Unfortunately, however, this renewed optimism has a shaky foundation. By design, the stress tests have avoided estimating the declines in the value of many toxic assets owned by banks. As a result, U.S. banks could well be in much worse shape than has been suggested by the stress tests.

                                                                                              The report announcing the results of stress tests stresses that supervisors conducted "a deliberately stringent test" and examined the ability of banks to absorb losses even under an "adverse" scenario... The report concludes that, with a modest aggregate addition of $75 billion in common equity, the banks will be well capitalized at the end of 2010 even under the adverse scenario. ...

                                                                                              However, for a bank that has "troubled assets" ... that do not become due until after 2011, supervisors did not attempt to come up with a precise estimate of the extent to which, at the end of 2010, the economic value of the troubled assets will fall below the $1 billion face value.

                                                                                              This approach overlooks a substantial amount of economic damage imposed on banks by the crisis. Indeed,... even if banks are able to avoid recognizing these declines in value on their financial statements until after 2010, there will still be such economic losses. A bank may be an economic zombie even if its financial statements do not yet show it.

                                                                                              The report acknowledges this major problem in a footnote, noting that its estimated losses "are not full lifetime losses … because the projections are for a two-year forward horizon and thus do not capture losses occurring beyond the end of 2010." ...

                                                                                              To get a full picture of the banks' situation, bank supervisors should estimate also the decline in the economic value of banks' positions with longer maturities. Only then will the stress tests be able to deliver reliable figures for the additional capital necessary to make the banking sector healthy and vigorous. Until such an analysis is done, it would be important to avoid the premature conclusion that the U.S. baking system is largely out of the woods.

                                                                                                Posted by on Thursday, May 21, 2009 at 02:11 PM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (3)


                                                                                                "Will the Stimulus Stifle Recovery?"

                                                                                                More people tired of hearing criticisms of the economic stimulus package that are wrong due to the "Great Forgetting":

                                                                                                Will stimulus spending stifle recovery?, by James W Dean and Richard G Lipsey, Economists Forum: The enormous stimulus packages hastily put together by governments in most large economies encounter two sorts of criticisms from many conservative economists. Both criticisms are wrong.

                                                                                                The first is that spending will either be hurried and wasteful, or that it won’t come on stream until employment has recovered, and will therefore be inflationary.

                                                                                                The second is that deficit-financed government spending merely replaces spending by consumers and firms dollar for dollar; so-called 100 per cent ‘crowding out’. Critics often fail to point out that these two arguments cannot both be true. If government spending merely replaces private spending dollar for dollar, it does not affect total demand. As a result, it cannot be inflationary. ...[...continue reading...]

                                                                                                On the first point, they conclude that:

                                                                                                To be sure, stimulus programmes should target projects with productive potential. Economies from the US to China are in dire need of new physical and social infrastructure. But even “unproductive” projects are better than none at all if the alternative is to leave labour and capital unemployed.

                                                                                                And if stimulus spending for infrastructure comes into effect after the end of recession, when real resources and financial markets are re-employed, there are adequate monetary tools to contain such pressures. In other words, long-term plans for infrastructure planning can stand on their own merit.

                                                                                                And on the second:

                                                                                                ...arguments that deficit-financed stimuli will be crowded out are far-fetched in the extreme...

                                                                                                  Posted by on Thursday, May 21, 2009 at 10:36 AM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (54)


                                                                                                  Greenspan's Capital Idea

                                                                                                  Yves Smith:

                                                                                                  Greenspan Says Banks Need More Capital, by Yves Smith: You have to give former Fed chairman Alan Greenspan credit for having no shame. Well, he did once look a bit rattled before Congress for about five minutes and 'fessed up it never occurred to him that people would be so greedy as to run companies so as to leave burned hulks in their wake.

                                                                                                  Did he utterly miss reading the news during Enron and the 2002 accounting scandals?

                                                                                                  Greenspan also made life difficult for Bernanke in early 2007 more than once. Indeed, prior to Greenspan, no former Fed chairman made frequent pronouncements. This is unseemly, but having a sense of propriety went out of fashion in America some time ago.

                                                                                                  Now Greenspan is saying the banks are not OK (if they need a lot more capital, then by definition, they are undercapitalized now) when the powers that be have a full court press on to present precisely that image. And whose responsibility might it be that the banks are in such sorry shape? Might the Greenspan Fed's extreme laissez faire stance have had a wee bit to do with it? ...

                                                                                                  This also goes along with his self-exonerating claim that the housing bubble was not caused by Fed policy under his watch, and that the problems could have been avoided if financial firms had larger capital buffers (and, according to Greenspan, all that is needed in terms of regulation is larger reserves against losses, no other regulation is needed, his often noted surprise at the failure of deregulated markets is that firms did not accumulate sufficient reserves on their own).

                                                                                                    Posted by on Thursday, May 21, 2009 at 12:02 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (34)


                                                                                                    links for 2009-05-21

                                                                                                      Posted by on Thursday, May 21, 2009 at 12:02 AM in Economics, Links | Permalink  TrackBack (0)  Comments (12)