Saturday, October 31, 2009
Using data released Friday morning, Jeremy Piger updated his estimates of U.S. recession probabilities through August of 2009. The results now suggest that the probability of recession was below 50% for both July and August. He notes that:
According to the model, the trough is June of 2009, with the peak being December 2007 (which matches the NBER peak). This makes the recession 18 months in duration, which would be the longest post-war recession (by two months over the 1973-1975 recession and the 1981-1982 recession).
Note that if I were to estimate a model that used only employment data, rather than the four variables highlighted by the NBER, the probability of an "employment recession" would still be quite high.
Friday, October 30, 2009
Mikhail Gorbachev says the crisis "was needed to reveal the organic defects of the present model of western development that was imposed on the rest of the world":
The Berlin wall had to fall, but today's world is no fairer, by Mikhail Gorbachev, Comment is Free: Twenty years have passed since the fall of the Berlin wall...
Alas, over the last few decades, the world has not become a fairer place: disparities between the rich and the poor either remained or increased, not only between the north and the developing south but also within developed countries themselves. The social problems in Russia, as in other post-communist countries, are proof that simply abandoning the flawed model of a centralized economy and bureaucratic planning is not enough, and guarantees neither a country's global competitiveness nor respect for the principles of social justice or a dignified standard of living for the population. ...
The real achievement we can celebrate is the fact that the 20th century marked the end of totalitarian ideologies, in particular those that were based on utopian beliefs.
Yet new ideologies are quickly replacing the old ones, both in the east and the west. Many now forget that the fall of the Berlin wall was not the cause of global changes but to a great extent the consequence of deep, popular reform movements that started in the east, and the Soviet Union in particular. After decades of the Bolshevik experiment and the realization that this had led Soviet society down a historical blind alley, a strong impulse for democratic reform evolved in the form of Soviet perestroika, which was also available to the countries of eastern Europe.
But it was soon very clear that western capitalism, too, deprived of its old adversary and imagining itself the undisputed victor and incarnation of global progress, is at risk of leading western society and the rest of the world down another historical blind alley.
Today's global economic crisis was needed to reveal the organic defects of the present model of western development that was imposed on the rest of the world as the only one possible; it also revealed that not only bureaucratic socialism but also ultra-liberal capitalism are in need of profound democratic reform – their own kind of perestroika.
Today, as we sit among the ruins of the old order, we can think of ourselves as active participants in the process of creating a new world. Many truths and postulates once considered indisputable, in both the east and the west, have ceased to be so, including the blind faith in the all-powerful market and, above all, its democratic nature. There was an ingrained belief that the western model of democracy could be spread mechanically to other societies with different historical experience and cultural traditions. In the present situation, even a concept like social progress, which seems to be shared by everyone, needs to be defined, and examined, more precisely.
I don't agree with everything he says (the full essay is much longer), but I think it is true that the market-based development models based upon strict ideological versions of the Washington consensus that were implemented in various places did not work out very well, and this undermined faith in these models. In addition, the economic crisis, along with the success China and other countries have had with different development models, has further undermined the faith that once existed in traditional market-based development strategies.
The Defining Moment, by Paul Krugman, Commentary, NY Times: O.K., folks, this is it. It’s the defining moment for health care reform. ...[L]egislation ... will almost surely pass. It’s not a perfect bill, by a long shot, but it’s a much stronger bill than almost anyone expected... And it would lead to near-universal coverage.
As a result,... politicians, people in the news media,... whoever is in a position to influence the final stage of this legislative marathon — now has to make a choice. The seemingly impossible dream of fundamental health reform is just a few steps away..., and each player has to decide whether ... to help it across the finish line or stand in its way.
For conservatives, of course, it’s an easy decision: They don’t want Americans to have universal coverage, and they don’t want President Obama to succeed.
For progressives, it’s a slightly more difficult decision: They want universal care, and they want the president to succeed — but the proposed legislation falls far short of their ideal. There are still some reform advocates who won’t accept anything short of ... Medicare for all... And even those who have reconciled themselves to the political realities are disappointed that the bill doesn’t include a “strong” public option, with payment rates linked to those set by Medicare.
But the bill does include a “medium-strength” public option, in which the public plan would negotiate payment rates... It also includes more generous subsidies than expected, making it easier for lower-income families to afford coverage. And according to Congressional Budget Office estimates,... 96 percent of legal residents too young to receive Medicare ... would get health insurance.
So should progressives get behind this plan? Yes. And they probably will. The people who really have to make up their minds, then, are ... the self-proclaimed centrists.
The odd thing about this group is that while its members are clearly uncomfortable with the idea of passing health care reform, they’re having a hard time explaining exactly what their problem is. Or to be more precise and less polite, they have been attacking proposed legislation for doing things it doesn’t and for not doing things it does.
Thus, Senator Joseph Lieberman ... says, “I want to be able to vote for a health bill, but my top concern is the deficit.” That would be a serious objection to the proposals ... if they would, in fact, increase the deficit. But they wouldn’t, at least according to the Congressional Budget Office...
Or consider the remarkable exchange that took place this week between Peter Orszag, the White House budget director, and Fred Hiatt, The Washington Post’s opinion editor. Mr. Hiatt had criticized Congress for not taking what he considers the necessary steps to control health-care costs — namely, taxing high-cost insurance plans and establishing an independent Medicare commission. ... Mr. Orszag pointed out, not too gently, that the Senate Finance Committee’s bill actually includes both of the allegedly missing measures.
I won’t try to psychoanalyze the “naysayers”... I’d just urge them to take a good hard look in the mirror. If they really want to align themselves with the hard-line conservatives, if they just want to kill health reform, so be it. But they shouldn’t hide behind claims that they really, truly would support health care reform if only it were better designed.
For this is the moment of truth. The political environment is as favorable for reform as it’s likely to get. The legislation on the table isn’t perfect, but it’s as good as anyone could reasonably have expected. History is about to be made — and everyone has to decide which side they’re on.
Sustainable Growth?, by Tim Duy: October is becoming my lost month. Between the beginning of Fall term and my annual conference in Portland, the month is a blur, and time to blog becomes a luxury. Now, however, I can see the light at the end of the tunnel. And we can also see the light at the end of the tunnel after this long recession, with a GDP report that confirms what everyone thought - the economy turned the corner in the third quarter of this year. Policymakers undoubtedly breathed a sigh of relief, and rightly so. That said, it is far too early for complacency; I found the underlying details less than comforting, especially in comparison to Wall Street's ebullient reaction to the data.
That the recession would end was never in doubt. Indeed, the timing is almost exactly what one would expected given the steep declines in spending in the first half of 2008 that triggered the flood of job losses later in the year. Spending, consumer spending most importantly, would not fall indefinitely, especially with the benefit of significantly lower energy costs beginning in the second half of last year. Moreover, as the Wall Street Journal notes, rebuilding household balance sheets is not accomplished by just increased savings; a default can do the job much more quickly, quickly adding to household cash flow. Indeed, I admit to being surprised that strategic defaults are not much higher.
The more important question is what will be the durability and sustainability of the recovery in the years ahead? The GDP report raises some significant red flags when considering this question. The consumer spending number was clearly goosed by the Cash for Clunker program and a much slower pace of inventory depletion than expected, which combined to add almost 2 percentage points to the headline figure. But auto sales have slipped back under the 10 million mark in September when the Clunkers program ended, with only a slight gain expected in October. And the slower inventory depletion suggests that firms are further along than expected in realigning stockpiles with demand, and that future improvement will need to stem from more significant improvements in underlying demand (see James Hamilton for a more positive interpretation).
Growth was further boosted by a jump in residential construction, but, as Calculated Risk points out, this sector's future contributions are likely to remain under pressure from high home and rental vacancy rate. Moreover, the impact of fiscal stimulus will fade as we move through next year, and there appears to be little political will to offer up additional stimulus.
Finally, note that net exports subtracted 0.53 percentage points of growth as import growth exceeded import growth. A balanced, sustainable recovery requires, in my opinion, that net exports contribute to growth. This showing reminds us of the ongoing dependence of US consumption on overseas production - stimulating consumption spending flows in part right out of the economy via imports. Recall also Federal Reserve Chairman Ben Bernanke's recent warning:
Some pushback against a recent article that questions the value of giving people on Social Security a $250 check to stimulate the economy and denounces President Obama for pandering to the elderly:
Are Those $250 Social Security Checks Just Pandering to Seniors?, by pgl: David Leonhardt tries to make this case... But why did Mr. Leonhardt start his discussion by talking about the depressed economy and who would be most likely to consume any checks that the government may wish to extend?
If you wanted to help the economy and you had $14 billion to bestow on any group of people, which group would you choose: a) Teenagers and young adults, who have an 18 percent unemployment rate. b) All the middle-age long-term jobless who, for various reasons, are not eligible for unemployment benefits. c) The taxpayers of the future (by using the $14 billion to pay down the deficit). d) The group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance. The Obama administration has chosen option d — people in their 60s and beyond.
Let’s think about the macroeconomic impact of a $14 billion one-time transfer payment in terms of a life-cycle model of consumption. This would be equivalent to a one-time increase in household wealth with the impact effect on consumption being equal to the increase in wealth divided by the number of remaining years of life for the individual receiving the check. If a young person were given $250, he would likely save most of it. If the $250 were given to the elderly instead, then more of the transfer payment would be consumed. Mr. Leonhardt seems to be unhappy with the President’s proposal but his reasoning here seems to be very confused.Dean Baker:
David Leonhardt's Age-Based Politics, by Dean Baker: David Leonhardt is upset that people on Social Security will get a $250 check from the government next year and denounces President Obama for pandering to the elderly. There is a lot of serious confusion in this piece.
First, he argues that the elderly have suffered less from the downturn from other groups be comparing declines in income and employment. This is actually a much tougher question that Leonhardt implies. The elderly have accumulated assets over their working lifetime. These assets plunged in value with the collapse of the housing bubble and the plunge in stock prices. This plunge has hit the elderly far more than other groups... So, if we took a wealth-based measure of impact, we would find that the wealthy were hit hardest by the downturn. ...
Second, in terms of government assistance, the making work pay tax credit is giving money to the vast majority of the under 65 population. The $250 boost to Social Security beneficiaries can be seen as an effort to provide comparable help to those who are no longer working. It's not obvious how this creates an injustice.
The third point is that Leonhardt seems to misunderstand the point of stimulus. We need people to spend money. Given the enormous idle capacity in the economy, we would benefit from handing checks to anyone who will agree to spend it. (Contrary to Leonhadt's assertion, this does not create a burden on children and grandchildren -- if anything the growth created by the stimulus is likely to mean we hand them a wealthier country.) The elderly will spend a high share of their checks, which makes this a good form of stimulus.
In fact, we really need larger deficits at this point to boost the economy, but politically this is not acceptable. We should thank the elderly for making some additional stimulus politically acceptable. ...
Lastly, we get a line about protecting Medicare benefiting the elderly at the expense of our grandchildren. Actually, we could substantially reduce costs for Medicare and fully protect the quality of care. However, this would require attacking the interests of the health care industry. This is an interest group that the politicians (and the media) really pander to.
The intergenerational transfer of wealth and advantage is nothing new, but what causes it?:
Inequality, 'silver spoon' effect found in ancient societies, EurekAlert: The so-called "silver spoon" effect -- in which wealth is passed down from one generation to another -- is well established in some of the world's most ancient economies, according to an international study coordinated by a UC Davis anthropologist.
The study, to be reported in the Oct. 30 issue of Science, expands economists' conventional focus on material riches, and looks at various kinds of wealth, such as hunting success, food sharing partners, and kinship networks.
The team found that some kinds of wealth, like material possessions, are much more easily passed on than social networks or foraging abilities. Societies where material wealth is most valued are therefore the most unequal, said Monique Borgerhoff Mulder, the UC Davis anthropology professor who coordinated the study with economist Samuel Bowles of the Santa Fe Institute.
The researchers also showed that levels of inequality are influenced both by the types of wealth important to a society and the governing rules and regulations.
The study may offer some insight into the not-too-distant future.
"An interesting implication of this is that the Internet Age will not necessarily assure equality, despite the fact that its knowledge-based capital is quite difficult to restrict and less readily transmitted only from parents to offspring," Borgerhoff Mulder said.
"Whether the greater importance of networks and knowledge, together with the lesser importance of material wealth, will weaken the link between parental and next-generation wealth, and thus provide opportunities for a more egalitarian society, will depend on the institutions and norms prevailing in a society," she said.
For years, studies of economic inequality have been limited by a lack of data on all but contemporary, market-based societies. To broaden the scope of that knowledge, Borgerhoff Mulder, Bowles and 24 other anthropologists, economists and statisticians from more than a dozen institutions analyzed patterns of inherited wealth and economic inequality around the world.
The team included three others from UC Davis - economics professor Gregory Clark, anthropology professor Richard McElreath and Adrian Bell, a doctoral candidate in the Graduate Group in Ecology.
They focused not on nations, but on types of societies - hunter gatherers such as those found in Africa and South America; horticulturalists, or small, low-tech slash-and-burn farming communities typical of South America, Africa and Asia; pastoralists, the herders of East Africa and Central Asia; and land-owning farmers and peasants who use ploughs and were studied in India, pre-modern Europe and parts of Africa.
Thursday, October 29, 2009
The stimulus package in action:
GDP Expanded 3.5% in 3rd Quarter, WSJ: The economy expanded in the third quarter after shrinking for four consecutive quarters, likely marking an end to the worst recession since World War II. But the recovery is expected to be slow, as the economy continues to fight rising unemployment and a persistent credit crunch.
Gross domestic product rose by a higher-than-expected seasonally adjusted 3.5% annual rate July through September, the Commerce Department said Thursday in its first estimate of third-quarter GDP. ... The rise in GDP was the first since the second quarter of 2008. It served as an unofficial confirmation that the longest and deepest recession since the Great Depression has ended. ...
The GDP gain was driven by consumer spending, which rose by 3.4% in the third quarter, compared with a 0.9% drop in the April-to-June period. Consumer spending contributed 2.36 percentage points to GDP growth.
Economists said the massive stimulus injected by the U.S. government, such as the cash for clunkers program that lifted car sales, helped boost consumer spending. Since the federal stimulus reached its maximum effect in the third quarter and the unemployment rate remains high, there's uncertainty over the sustainability of the recovery.
Price gauges showed the core inflation rate -- which strips out volatile food and energy prices and is closely watched by the Federal Reserve -- slid to 1.4% from 2.0% in the second quarter, in a sign that price pressures remain subdued. ...
While the economy has resumed rising, joblessness is still high. ... The number of U.S. workers filing new claims for jobless benefits fell slightly last week... Initial claims for jobless benefits declined by 1,000 to 530,000 in the week ended Oct. 24. The previous week's level was unrevised at 531,000. ... Claims still remain at a fairly high level, suggesting the job market has a long recovery ahead. ...
I hope we don't become overly optimistic and pull back on help for the economy too soon, we don't know for sure if the increase in growth is sustainable without help from the stimulus package, and I also hope that we don't forget about labor markets which are likely to lag far behind the recovery for output.
As I've noted here several times in the past, most recently with respect to health care, we do not always believe that the market system allocates goods and services equitably, and in those cases we often ration the good or service by means other than the price system.
Here's Daniel Little on the "moral economy of the crowd":
Fair prices?, by Daniel Little: We live in a society that embraces the market in a pretty broad way. We accept that virtually all goods and services are priced through the market at prices set competitively. We accept that sellers are looking to maximize profits through the prices, quantities, and quality of the goods and services that they sell us. We accept, though a bit less fully, the idea that wages are determined by the market -- a person's income is determined by what competing employers are willing to pay. And we have some level of trust that competition protects us against price-gouging, adulteration, exploitation, and other predatory practices. A prior posting questioned this logic when it comes to healthcare. Here I'd like to see whether there are other areas of dissent within American society over prices.
Because of course it wasn't always so. E. P. Thompson's work on early modern Britain reminds us that there was a "moral economy of the crowd" that profoundly challenged the legitimacy of the market; that these popular moral ideas specifically and deeply challenged the idea of market-defined prices for life's necessities; and that the crowd demanded "fair prices" for food and housing (Customs in Common: Studies in Traditional Popular Culture). The moral economy of the crowd focused on the poor -- it assumed a minimum standard of living and demanded that the millers, merchants, and officials respect this standard by charging prices the poor could afford. And the rioting that took place in Poland in 1988 over meat prices or rice riots in Indonesia in 2008 are reminders that this kind of moral reasoning isn't merely part of a pre-modern sensibility. (For some quotes collected by E. P. Thompson from "moral economy" participants on the subject of fair prices see an earlier posting on anonymity.)
So where do contemporary Americans show a degree of moral discomfort with prices and the market? Where does the moral appeal of the principles of market justice begin to break down -- principles such as "things are worth exactly what people are willing to pay for them" and "to each what his/her market-determined purchasing power permit him to buy"?
There are a couple of obvious exceptions in contemporary acceptance of the market. One is the public outrage about executive compensation in banking and other corporations that we've seen in the past year. People seem to be morally offended at the idea that CEOs are taking tens or hundreds of millions of dollars in compensation -- even in companies approaching bankruptcy. Part of the outrage stems from the perception that the CEO can't have brought a commensurate gain to the company or its stockholders, witness the failing condition of many of these banks and companies. Part is a suspicion that there must be some kind of corrupt collusion going on in the background between corporate boards and CEOs. But the bottom line moral intuition seems to be something like this: nothing could justify a salary of $100 million, and executive compensation in that range is inherently unfair. And no argument proceeding simply along the lines of fair market competition -- "these are competitive rational firms that are offering these salaries, and therefore whatever they arrive at is fair" -- cuts much ice with the public.
Here is another example of public divergence from acceptance of pure market outcomes: recent public outcries about college tuition. There is the common complaint that tuition is too high and students can't afford to attend. (This overlooks the important fact that public and private tuitions are almost an order of magnitude apart -- $6,000-12,000 versus $35,00-42,000!) But notice that this is a "fair price" argument that would be nonsensical when applied to the price of an iPod or a Lexus. People don't generally feel aggrieved because a luxury car or a consumer device is too expensive; they just don't buy it. It makes sense to express this complaint in application to college tuition because many of us think of college as a necessity of life that cannot fairly be allocated on the basis of ability to pay. (This explains why colleges offer need-based financial aid.) And this is a moral-economy argument.
And what about that other necessity of life -- gasoline? Public complaints about $4/gallon gas were certainly loud a year ago. But they seem to have been grounded in something different -- the suspicion that the oil companies were manipulating prices and taking predatory profits -- rather than an assumption of a fair price determined by the needs of the poor.
Finally, what about salaries and wages? How do we feel about the inequalities of compensation that exist within the American economy and our own places of work? Americans seem to accept a fairly wide range of salaries and wages when they believe that the differences correspond ultimately to the need for firms to recruit the most effective personnel possible -- a market justification for high salaries. But they seem to begin to feel morally aggrieved when the inequalities that emerge seem to exceed any possible correspondence to contribution, impact, or productivity. So -- we as Americans seem to have a guarded level of acceptance of the emergence of market-driven inequalities when it comes to compensation.
One wonders whether deeper resentment about the workings of market forces will begin to surface in our society, as unemployment and economic recession settle upon us.
China sends a message:
China to investigate US car subsidies, by Sarah O’Connor: China is preparing to launch a trade investigation into whether US carmakers are being unfairly subsidised by the US government...
The move comes at a time of heightened trade tensions between the two countries after the US imposed duties on Chinese tires last month. Many warned this would prompt Beijing to retaliate.
Few vehicles are actually exported from the US to China, but the move would have symbolic power by turning the tables on Washington. ... The investigation could lead to import duties. ...
China has already told the US that it has received a petition for an investigation, which ... would formally launch on Wednesday. Before that, the two countries will negotiate. Top US government officials are already in China for trade talks this week, and Barack Obama, US president, is due to visit the country next month.
China had notified the US it had received anti-dumping and countervailing duty petitions on cars, a spokeswoman for the United States Trade Representative said.
World Trade Organization rules require China to invite the US to consult on the countervailing duty petition before initiating any investigation... The countries expect to consult over coming days. ...
China has received an anti-dumping petition as well, which asks for investigation into whether US car exports are being sold at unfairly low pries. ...
Martin Feldstein says bond markets disagree with him, so they must be wrong:
The global impact of America’s healthcare debate, Commentary, Project Syndicate: Since assuming the presidency earlier this year, Barack Obama’s ... proposals are meeting strong opposition from fiscally-conservative Democrats as well as from Republicans, owing to their potential impact on future fiscal deficits. ...
[A]n overwhelming majority of Americans are insured, with government a major financier of healthcare. But there remain about 54 million individuals who are not formally insured, and some insured individuals still face the risk of financially ruinous medical costs if they have very expensive medical treatment.
Obama campaigned on the goals that everyone should have health insurance, that high medical costs should not bankrupt anyone... But, rather than producing a specific proposal, he left it to Congress to design the legislation. ...
In fact, there is a strong risk that this legislation would ultimately add to the fiscal deficit. Increasing the number of insured by 35 million and broadening protection for some who are now insured implies increased demand for healthcare, which could raise the cost of care paid for by the government as well as by private healthcare buyers. In addition, both sources of financing are also uncertain. ...
In considering the fiscal implications of Obama’s health proposals, it is important that the current legislation would still leave 25 million individuals without insurance.
How much would it cost to insure them if the gross cost is now projected at US$800bil for the easier-to-insure 35 million? And how could that cost be financed...? Closing that gap could add more than $1 trillion to the government’s cost over the next 10 years.
It is clear that there is a significant danger that the current legislation would add substantially to future US deficits – and establish a precedent for even more expensive expansions of healthcare in the future.
This would come on top of the currently projected fiscal deficits in both the near term and over the coming decade – and before America’s demographic shift substantially raises the cost of Social Security and Medicare.
Surprisingly, the bond market still seems almost oblivious to this risk. But holders of US debt worldwide have every reason to be concerned.
The bond markets are right.
Wednesday, October 28, 2009
Part of an interview of Michael Woodford:
Q&A: Economist Woodford on Fed and Rate Expectations, RTE: ...Given the importance of financial stability for the wider economy, do you think financial stability should play a greater or explicit role in the Federal Reserve’s policy strategy?
Woodford: No doubt, the Fed should give greater attention to financial stability than it did in the past. One should try and set up a framework to safeguard financial stability, and it may very well be that ... central banks should play a key role. But, ideally, one would be scrutinizing the risks developing and adjust capital requirements accordingly, rather than using monetary policy to respond to these risks. You’ve got to realize that pretending you can do everything with one tool means you won’t do any of them too well.
Should the Fed be more reactive — leaning against the wind -toward sharp moves in asset prices, such as house prices and equities? Should the Fed include a broader range of asset prices in its policy strategy?
Woodford: I’m not too sympathetic of that way of putting things. Using monetary policy to prevent certain moves in asset prices wouldn’t be a terribly effective tool. And to the extent that it would be effective, it’d involve important costs for the rest of the economy. It’d be particularly bad for the Fed to be saying “we have a view on where asset prices should be, and we’re going to get them there by using monetary policy.” Instead, the focus of the Fed’s investigation should be on what kind of risks financial institutions get themselves into — not on asset prices as such.
The Fed has downgraded the role of money and credit aggregates in its policy strategy. Given the more recent developments, do you think it’s now time to reconsider, or reverse the move?
Woodford: The issue that deserves more attention is monitoring risks to financial stability and identifying possible systemic risks. Unfortunately, traditional monetary and credit statistics aren’t that closely related to the things you really ought to be measuring. For example, lending by non-bank entities has played an important role in the recent real-estate euphoria. Given the emergence of new kinds of institutions and financing arrangements, you cannot simply revert to the old statistics people used to look at decades ago. There should be more research on understanding which measures are in fact the valuable indicators.
The last section is important. Many people have said that we cannot tell when a bubble is inflating (and thus when risks are increasing), but how hard have we actually tried? Have we seriously looked at data on, to name just one element of what I have in mind, leverage cycles? Do we know how leverage cycles relate to crises, that kind of knowledge that years of hard work by a variety of researchers brings about? Some people likely know the answer to this, or at least have some idea about this, but it's not data you'll find in standard sources such as FRED. As another example, what about measures and data on the degree of financial market connectedness? This can be measured in principle, but little effort has been devoted to doing so. Even traditional measures such as P/E ratios and Q-ratios haven't received the attention they deserve.
Until we dig in and try seriously to develop new empirical measurements that can monitor and identify risks, measures intended to inform us when risks are increasing to dangerous levels, we won't know if we can identify bubbles or not. I understand that financial theory says such predictions are impossible, and this has led people to shy away from such work, but that result relies upon assumptions that may not be true. The crisis has revealed the shaky foundation those models rest upon, so it's no longer an excuse for not trying, or, as in the past, for dismissing work along these lines as unimportant and a waste of time.
Spencer at Angry Bear on the "secular decline in labor's share of the pie":
Labor's Share, by Spencer: The issue of a jobless recovery is getting a lot of attention recently.
I've found the best way to look at the issue is to compare the change in real growth and productivity over the long run. There have been three periods of different productivity trends in modern US economic history.
Prior to about 1973 productivity growth averaged 2.8%. In the second or low productivity era, running from 1974 to 1995, productivity growth slowed to 1.5% before rebounding to 2.4% since 1995.
But real GDP growth also slowed over this period. ... Basically, real GDP growth equals productivity growth plus hours worked or employment growth. A consequence of stronger productivity in an era of weaker GDP growth this suggests that each percentage point increase in real GDP growth generates a much weaker increase in hours worked or employment. ...
But to a certain extent comparing productivity and real GDP is comparing apples to oranges. To be accurate one should look at productivity versus output in the nonfarm sector. GDP includes the farm sector of course, but also the nonprofit and government sectors where productivity is assumed to be zero.
If you look at what happened in the 1990s and early 2000s recoveries in the nonfarm business sector, you see that productivity growth significantly outpaced output growth in the early recovery phase of the cycle. As a consequence hours worked or employment fell, generating the jobless recoveries. It looks like the problem in these two cycles was much weaker growth rather than strong productivity. ... This shift to an environment of stronger productivity and weaker real growth generated an interesting development that has received little attention among economists or in the business press.
This development was a secular decline in labor's share of the pie. Prior to the 1982 recession there was a strong cyclical pattern of labor's but it was around a long term or secular flat trend. But since the early 1980s labor's share of the pie has fallen sharply by about ten percentage points. Note that the chart is of labor compensation divided by nominal output indexed to 1992 = 100. That is because the data for each series is reported as an index number at 1992=100 rather than in dollar terms. So the scale is set to 1992 =100 rather than in percentage points. But it still shows that labor payments as a share of nonfarm business total output has declined sharply over the last 20 years and prior to the latest cycle we did not even see the normal late cycle uptick in labor's share.
If this chart gets a lot of attention it will be interesting to see how the libertarian and/or conservative analysts who keep coming up with all types of excuses to explain away the weakness in real labor compensation in recent years explain this away. If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.
I'll just add that the point at which the decline begins (in the early 1980s) is generally associated with the onset of the Great Moderation.
Jeff Sachs says we need to be sure that climate control legislation is not captured by powerful special interest groups:
A Clunker of a Climate Policy, by Jeffrey D. Sachs, Commentary, Scientific American: The Cash for Clunkers program offers a cautionary tale for the future of climate change control. ... The broad principle of climate change mitigation is to reduce greenhouse gas emissions ... to target levels at the minimum net cost to society. There are many ways to reduce emissions: drive more efficient or electrically powered vehicles; produce electricity with renewable energy sources; capture CO2 from power plants and store it geologically; restart the nuclear power sector; weatherproof homes... The list is long, with different time horizons, costs and uncertainties.
Clearly, not every method of reducing emissions makes equal sense. ...McKinsey & Company has recently published estimates of the abatement costs of various technologies. Highly efficient lighting, appliances and vehicles, along with better insulation and other technologies, can save more in energy costs during their lifetime than the upfront capital for installing them: they are better than free to society. Other options—notably, renewable energy sources, forest conservation programs and carbon capture and storage—tend to come in below $60 per ton of avoided CO2 emissions.
Some carbon-reduction ideas are so expensive they should play no part in the policy mix. Yet because lobbyists overrun our legislative processes,... lots of terrible ideas will no doubt be advocated.
Let’s make a rough calculation of how much mitigation per dollar the Cash for Clunkers program really achieved. ...[calculations]... The net annual cost of the CO2 reduction is therefore ... $141 per ton of CO2. ... This crude calculation is subject to many refinements but shows that Cash for Clunkers represented a very high cost per ton of CO2 avoided. Countless ways to reduce CO2 emissions are less expensive than smashing up autos five years before their natural demise.
We will blunder badly and repeatedly in climate change control unless we put some transparent control systems in place. We should rely heavily on price signals rather than one-by-one subsidized programs, except for the subsidies needed to bring new technologies such as electric vehicles to the commercial phase. An economy-wide tax on each ton of CO2 emissions, programmed to rise gradually over time at an appropriate social discount rate, would induce the marketplace to take actions that are less expensive per ton than the tax and to leave behind measures such as Cash for Clunkers or corn to ethanol. A carbon tax would be far more effective in this regard than the cumbersome cap-and-trade system proposed by the House of Representatives.
We’ll need to spend trillions of dollars over time to save the planet from climate change. All the more reason not to let lobbyists make a financial game out of this deadly serious effort.
Luigi Zingales is worried that populist anger might fall into the hands of evil Democrats rather than Republicans who would, of course, use this strong populist force for good:
Pro-Market Populism Is GOP's Out, by Luigi Zingales, Commentary, investors.com: ...[T]he financial crisis has created significant discontent. In a survey taken last December, 60% of Americans declared themselves "angry" or "very angry" about the economic situation.
If Republicans ignore this popular anger, as the party establishment did last autumn, they leave a powerful and potentially disruptive force in the hands of Democrats. The Democrats could channel popular anger into protectionism, 90% tax rates and onerous new market constraints.
In Republican hands, populism could become a strong force for positive change.
And Republicans would do this by adopting Democratic ideas:
The Republican Party has to move from a pro-business strategy that defends the interests of existing companies to a pro- market strategy that fosters open competition and freedom of entry.
While the two agendas sometimes coincide, they are often at odds. Established firms are threatened by competition and frequently use their political muscle to restrict new entries into their industry, strengthening their positions but putting their customers at a disadvantage.
Reducing market power through regulation and is something Democrats have long advocated, but Republicans have argued that the market takes care of this itself, there's no need for government to intervene. So how would Republicans solve the problem in, say, the financial industry?
A pro-market strategy aims to encourage the best conditions for doing business, for everyone. Large banks benefit from trading derivatives (such as credit default swaps) over the counter, rather than in an organized exchange. ... For this reason, they oppose moving such trades to organized exchanges, where transactions would be conducted with greater transparency, liquidity and collateralization — and so with greater financial stability. This is where a pro-market party needs the courage to take on the financial industry on behalf of everyone else.
Again, that sounds like what Democrats have been saying, that these markets need to be regulated.
What else is involved in this pro-market strategy that will save the Republican party?
A pro-market strategy rejects subsidies because they're a waste of taxpayers' money and because they prop up inefficient firms, delaying the entry of new and more efficient competitors.
And a pro-market approach holds companies financially accountable for their mistakes — an essential policy if free markets are to produce sound decisions.
A pro-market party will fight tirelessly against letting firms become so big that they cannot be allowed to fail, since such firms may take risks that ordinary companies would never dream of.
I can imagine a few people on the left supporting some types of subsidies, but generally I don't think you'll get much disagreement here either (e.g. see Sachs on subsidies in the post above this one). The accountability thing sounds like a jab at government intervention to save the bank (as does the first point), but take a look at the latest proposal from Democrats that attempts to put the cost of bailouts on the companies themselves while still protecting the economy (as opposed to just letting it melt down). But go on...
A pro-market party should favor a robust safety net — for people, not companies. Of course, this safety net should be run on market principles as much as possible. Unemployment insurance should retain incentives for people to look for work, and the health-insurance industry should be opened up to competition. But defenders of markets cannot ignore the importance of providing such security for citizens.
The details would differ a bit, e.g. the health insurance competition part certainly differs from a Medicare for all structure many Democrats endorse (but not all), but the general idea of a "robust safety net" for people seems consistent with Democratic ideas, less so with Republican principles.
Besides robust safety nests, what else is on the long-time concern of Republican's list?
They also cannot ignore the nation's growing income inequality and the widespread loss of confidence that the future will be better than the past. The knee-jerk Democratic reaction is to give these poorer citizens entitlements disguised as rights.
The Republican response should focus on providing opportunities. Parents should have access to good schools for their kids, regardless of their financial means or where they live. The best way to deliver on that promise is through a voucher system.
Entitlements disguised as rights? Such as? The general idea that some
kids are disadvantaged by the education they receive has been a mainstay within
the Democratic party for a long time, and quite a few Democrats endorse vouchers as part of the solution
(even breaking up teacher's unions in some cases).
And concern over inequality? From Republicans? Generally Republicans argue that inequality isn't really increasing or as bad as you think (the attack the data when you don't like the answer approach), or that it's necessary to fuel the engine of capitalism.
What's next on the list of Democratic ideas disguised as Republican concerns?
Students should have better access to loans to finance their education because everyone gains from a better-educated work force. The unemployed should have access to retraining, which can also be designed through a voucher system.
Student loans, help with finding new employment? Yet again, strong Democratic ideas. The only thing new is to toss in a voucher system, but that's a debate about how best to reach the goal, not what the goal is (and again, vouchers aren't automatically rejected by all Democrats). I suppose you'll want to adopt health care as a Republican idea as well?
Health care should be available in the marketplace. The current system, in which only employers get a tax deduction for health insurance, reduces labor mobility and increases the cost of becoming unemployed.
What is the goal here? If it's to make health care affordable and available to everyone, simple saying it ought to be "in the marketplace" is far from enough. The incompleteness of the proposal makes this hard to evaluate (but given the proposals so far, you have to think the work "vouchers" would be involved in the solution).
The U.S. has been the inspiration for all who believe in freedom, both political and economic. Its identity, however, is predicated on maintaining a political consensus that supports market values.
Growing income inequality, the financial crisis and the perceived unfairness of the market system are undermining this consensus. If Republicans don't stand up for markets, who will?
If standing up for markets means -- running down the list above in order -- reducing market power, regulating financial markets, eliminating subsidies, breaking up too big to fail firms, providing a robust safety net, overcoming income inequality, fixing schools, increasing the availability of student loans, providing retraining, and providing health care, then the answer is Democrats.
Tuesday, October 27, 2009
As many of us have been saying for some time now, more stimulus would speed the recovery -- the jobs outlook is particularly worrisome -- but unfortunately, it doesn't appear that more stimulus is politically feasible:
The Case for More Stimulus, Editorial, NY Times: The consensus among economists is that the recession is over, and, technically, the herd is probably right. ... Immense federal stimulus has jolted the economy.
But... The economy is going to need more government support, or it is bound to be very weak for a very long time — and vulnerable to a relapse into recession. Unemployment is expected to worsen well into next year, exceeding 10 percent. Foreclosures are expected to rise, which will push home values down further. Hundreds of small and midsize banks are likely to fail in coming years. State and local governments face budget shortfalls in 2010 that are as bad or worse than this year’s.
Yet Washington is not providing a coherent plan for effective stimulus. The Senate has been hamstrung for nearly a month over the most basic relief-and-recovery boost: an extension of unemployment benefits. ... Lawmakers in both parties fret that large budget deficits preclude more stimulus, lest the burden of debt outweigh the benefit of deficit spending. ... Deficits are a serious issue, but the immediate need for stimulus trumps the longer-term need for deficit reduction. A self-reinforcing stretch of economic weakness would be far costlier than additional stimulus.
The Senate could take a step in the right direction by extending unemployment benefits without further delay. ... Next, Congress and the administration should agree on ways to ease the dire financial condition of the states. Most important is continued aid for state Medicaid programs... As long as the states are suffering, any economic recovery efforts by the federal government are undermined. ...
Without another round of effective stimulus, the worst recession in modern memory will likely become — at best — the weakest recovery in modern memory. Another boost to federal spending that is targeted and timely should not be too much for politicians to deliver.
Recall this recent graph from the San Francisco Fed:
Output is not expected to return to potential until well into 2012.
Now recall the long delay between the end of the last two recessions and the peak in the unemployment rate (or just about any other labor market indicator):
And the recovery for the labor market could be even slower this time.
To be fully effective, plans for additional stimulus should have been in place long ago. However, given how long the recovery is expected to take, it's not too late to do more if we get started right away. But the political climate makes it highly unlikely that labor markets and the economy will get the help that they need.
Daniel Gross says it's no mystery why the Chamber of Commerce suddenly finds itself on the outside looking in:
The Chamber's Mistakes, by Daniel Gross, Commentary, Slate: This has been a rough period for the Chamber of Commerce, the Washington, D.C., organization that claims to be the voice of American business. Its doubts about climate change ... have led prominent members to quit... With Democrats controlling both Congress and the White House, it doesn't have natural allies. ... The change in political facts ... and its own poor choice of words have left the chamber feeling a bit left out. CEO Thomas Donahue gave a long interview to the Wall Street Journal (the editorial page) complaining about the chamber's poor treatment, lamenting that its wise counsel wasn't being sought in the formulation of policy, and vowing to fight. ...
But there is a fundamental reason why the chamber isn't being invited into the rooms where legislation and policy are being made these days: It doesn't have much to offer. For generations, the Chamber of Commerce has held itself out as the sensible, we-know-better voice of business: Follow the policies we—i.e. American business—approve and advocate, and the nation will grow and prosper. We'll have more jobs, higher wages, rising asset values, and widely shared prosperity. ...
From 2001 to 2008, the nation listened. It elected and then put into place exactly the policies the chamber advocated. And the chamber utterly failed to deliver.
The Chamber of Commerce may not have ruled the country during the Bush years. But it had the next best thing: a Republican administration in the White House and Republican control of Congress for most of that period. The chamber applauded as they delivered cuts in marginal tax rates and in taxes on capital gains, dividends, and estates. The government was supportive of free trade and largely hostile to labor unions, which continually lost ground. We saw aggressive moves to outsource government functions and increase the use of private-sector contractors. We opened up energy resources to development. Interest rates were low. Regulation? Virtually nonexistent in many sectors. Business lobbyists were allowed essentially to write crucial legislation. These policies, the Bush administration economic team promised us, would be superior to the ones that prevailed in the 1990s. And the proof would be in the numbers: jobs, market performance, income, wealth.
But it didn't work out for anybody. By pretty much any measure, the years from 2001 to 2008 were lost ones. Job creation was extraordinarily weak... Wealth didn't expand, either. In fact,... in this decade, income inequality rose, the percentage of people living below the poverty line rose..., the number of people getting health insurance from their employers fell, and median income failed to budge. The stock market? Forget about it. Oh, and at the end of it, the financial system, which got precisely the regulatory environment it wanted from Washington, blew itself up, inflicting hundreds of billions of dollars of costs on taxpayers. ...
These were excellent conditions for businesses to do what the Chamber of Commerce says they're supposed to do. But the policies failed in their intended results, which is the reason Democrats now control every lever of power—and why the Chamber of Commerce is standing with its face pressed against the glass.
Guillermo Calvo sketches an outline of a theoretical framework to explain the crisis. In this model, the demand for international reserves, low US interest rate policy and lax financial regulation leads to the creation of fragile financial instruments and the "large-scale creation of quasi-money subject to self-fulfilling-expectations runs":
Reserve accumulation and easy money helped to cause the subprime crisis: A conjecture in search of a theory, by Guillermo Calvo, Vox EU: A view that is gaining popularity as one of the fundamental explanations for the current crisis is that emerging markets’ voracious appetite for international reserves coupled with record-low US policy interest rates and lax financial regulation to produce a frantic “search for yield,” the creation of fragile financial instruments, and occasionally outright fraud. For example see Henry Paulson’s discussion quoted in Guta (2009).
This view – particularly, the “financial fragility” component – could help to answer a central question, namely, why minor fireworks in the subprime mortgage market ignited a fearsome powder keg and a local problem became global in a short span of time.
In this column, I will present a framework that provides some conceptual support for the view. The framework stresses fragilities associated with liquid financial instruments that have long been identified in the finance literature.1 For the sake of concreteness, I will focus on the Fed and abstract from international aspects, unless strictly necessary.
Monday, October 26, 2009
Joseph Stiglitz says there's a diverse set of ideas within the economics profession, ideas that go beyond the "self-regulating, fully efficient markets that always remain at full employment" pushed by some economists. These ideas have had trouble finding their way into the mainstream, and that has limited our ability to move beyond the confines of standard approaches to macroeconomic modeling. But that may change (and hopefully will change) for the better since the crisis has "given new impetus to the exploration of alternative strands of thought that would provide better insights into how our complex economic system functions":
Let A Hundred Theories Bloom, by George Akerlof and Joseph Stiglitz, Commentary, Project Syndicate: BUDAPEST – The economic and financial crisis has been a telling moment for the economics profession, for it has put many long-standing ideas to the test. If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.
But there is, in fact, a much greater diversity of ideas within the economics profession than is often realized. This year’s Nobel laureates in economics are two scholars whose life work explored alternative approaches. Economics has generated a wealth of ideas, many of which argue that markets are not necessarily either efficient or stable, or that the economy, and our society, is not well described by the standard models of competitive equilibrium used by a majority of economists.
Behavioral economics, for example, emphasizes that market participants often act in ways that cannot easily be reconciled with rationality. Similarly, modern information economics shows that even if markets are competitive, they are almost never efficient when information is imperfect or asymmetric (some people know something that others do not, as in the recent financial debacle) – that is, always.
A long line of research has shown that even using the models of the so-called “rational expectations” school of economics, markets might not behave stably, and that there can be price bubbles. The crisis has, indeed, provided ample evidence that investors are far from rational; but the flaws in the rational expectations line of reasoning—hidden assumptions such as that all investors have the same information—had been exposed well before the crisis.
Just as the crisis has reinvigorated thinking about the need for regulation, so it has given new impetus to the exploration of alternative strands of thought that would provide better insights into how our complex economic system functions – and perhaps also to the search for policies that might avert a recurrence of the recent calamity.
Fortunately, while some economists were pushing the idea of self-regulating, fully efficient markets that always remain at full employment, other economists and social scientists have been exploring a variety of different approaches. These include agent-based models that emphasize the diversity of circumstances; network models, which focus on the complex interrelations among firms (such as those that enable bankruptcy cascades); a fresh look at the neglected work of Hyman Minsky on financial crises (which have increased in frequency since deregulation began three decades ago); and innovation models, which attempt to explain the dynamics of growth.
Much of the most exciting work in economics now underway extends the boundary of economics to include work by psychologists, political scientists, and sociologists. We have much to learn, too, from economic history. For all the fanfare surrounding financial innovation, this crisis is remarkably similar to past financial crises, except that the complexity of new financial products reduced transparency, aggravating fear about what might happen should there not be a massive public bailout.
Ideas matter, as much or perhaps even more than self-interest. Our regulators and elected officials were politically captured – special interests in the financial markets gained a great deal from rampant deregulation and the failure to adapt the regulatory structure to the new products. But our regulators and politicians also suffered from intellectual capture. They need a wider and more robust portfolio of ideas to draw upon.
That is why the recent announcement by George Soros at the Central European University in Budapest of the creation of a well-funded Initiative for New Economic Thinking (INET) to help support these is so exciting. Research grants, symposia, conferences, and a new journal – all will help encourage new ideas and collaborative efforts to flourish.
INET has been given complete freedom – with respect to both content and strategy – and one hopes that it will draw further support from other sources. Its only commitment is to “new economic thinking,” in the broadest sense. Last month, Soros assembled a remarkable group of economic luminaries, from across the spectrum of the profession –theory to policy, left to right, young and old, establishment and counter-establishment—to discuss the need and prospects for such an initiative, and how it might best proceed.
For the past three decades, one strand within the economics profession was constructing models that assumed that markets worked perfectly. This assumption overshadowed a wide body of research that helped explain why markets often work imperfectly – why, indeed, there are widespread market failures.
The marketplace for ideas also often works in a way that is less than ideal. In a world of human fallibility and imperfect understanding of the complexity of the economy, INET holds out the promise of the pursuit of alternative strands of thought – and thereby at least ameliorating this costly market imperfection.
As I've noted before, I don't think it was the tools or the topics we study that was the problem, it was the questions the leaders in the profession emphasized (or ridiculed as the case may be). The emphasis on particular questions leads to a dominant presence of this line of work in journals, the source of advancement within the profession, and this crowds out alternative approaches. It will be interesting to see which of these ideas, if any, will now "find its time."
I can't say I stay awake at nights worrying about the super human part, but inequality in health care is an issue:
Will the Super Rich Evolve Into a Separate Species?, Discover Blog: As medicine becomes super advanced, and super expensive, the super rich may evolve into a completely different species from everyone else, according to American futurologist Paul Saffo. He thinks medical technology such as replacement organs, specially tailored drugs, and genetic research tools to alert the moneybags of any possible hereditary health dangers, could all lead to a new class of rich, elite, and longer-living humans.
Here are Saffo’s thoughts on the advantages this would give the rich, as reported in the Guardian:
“I sometimes wonder if the very rich can live, on average, 20 years longer than the poor. That’s 20 more years of earning and saving. Think about wealth and power and the advantages that you pass on to your children.”
At the very least, they’ll be able to afford health care—and keep opposing it for the rest of is.
I'm probably missing the finer philosophical points in this discussion of self-interest (e.g. the proposed solution to the logical inconsistency associated with the idea that a person's own well-being is especially significant, and whether a stable self exists at all), but it seems to me that philosophers are to a large extent rediscovering Adam Smith's Theory of Moral Sentiments (and if that is incorrect, I'd be curious to hear how this differs significantly from Smith's ideas):
You, yourself and you, MIT News Office: Caspar Hare would like you to try a thought experiment. Consider that 100,000 people around the world tomorrow will suffer epileptic seizures. "That probably doesn't trouble you tremendously," says Hare, an associate professor in MIT's Department of Linguistics and Philosophy.
Now imagine that one those 100,000 people will be you. "In that case you probably would be troubled," observes Hare, speaking in his office. If this is your reaction, he says, "You regard you own pleasures and pains as being especially significant." Which seems natural, Hare adds. "We have a tendency to think that what we care about is important in and of itself."
Yet this tendency creates an apparent inconsistency. You cannot claim your own well-being is uniquely meaningful, more important than the well-being of others, and expect anyone else to regard that notion as an objective fact, something that could be part of a universally acceptable morality.
How should we reconcile these differing perspectives? In recent decades, many philosophers have dismissed our self-interest as a kind of illusion. Indeed, a major current of contemporary thinking has questioned whether a stable "self" exists at all. "We are not what we believe," the British philosopher Derek Parfit has written. Rather, this view holds, we are nothing more than ever-shifting collections of mental and physiological states, lacking a definite, lasting identity.
One health care reform passes, and it looks more and more like it will, is there any reason to be optimistic that the highly politically compromised reform bill will actually help people?:
After Reform Passes, by Paul Krugman, Commentary, NY Times: So, how well will health reform work after it passes? There’s a part of me that can’t believe I’m asking that question. After all, serious health reform has long seemed like an impossible dream. And it could yet go all wrong. But ... it looks highly likely that Congress will, indeed, send a health care bill to the president’s desk. Then what?
Conservatives insist (and hope) that reform will fail, and that there will be a huge popular backlash. Some progressives worry that they might be right, that the imperfections... — what we’re about to get will be far from ideal — will be so severe as to undermine public support. And many critics complain, with some justice, that the planned reform won’t do much to contain rising costs.
But the experience in Massachusetts, which passed major health reform back in 2006, should dampen conservative hopes and soothe progressive fears. ... It ... has gone a long way toward achieving the goal of health insurance for all..., only 2.6 percent of residents remain uninsured.
This expansion of coverage has tremendous significance in human terms. The Kaiser Commission on Medicaid and the Uninsured recently ... reported that “Health reform enabled many ... individuals to take care of their medical needs, to start seeing a doctor, and in some cases to regain their health and control over their lives.” Even those who probably would have been insured without reform felt “peace of mind knowing they could obtain health coverage if they lost access to their employer-sponsored coverage.”
And reform remains popular...: an overwhelming 79 percent of the public think the reform should be continued, while only 11 percent think it should be repealed. Interestingly, another recent poll shows similar support among the state’s physicians...
There are, of course, major problems remaining in Massachusetts. In particular, while employers are required to provide a minimum standard of coverage, in a number of cases this standard seems to be too low, with lower-income workers still unable to afford necessary care. And the Massachusetts plan hasn’t yet done anything significant to contain costs.
But just as reform advocates predicted, the move to more or less universal care seems to have helped prepare the ground for further reform, with a special state commission recommending changes ... that could contain costs by reducing the incentives for excessive care. And it should be noted that Hawaii, which ...[has] a long-standing employer mandate, has been far more successful than the rest of the nation at cost control.
So what does this say about national health reform?
To be sure, Massachusetts isn’t fully representative of America as a whole. Even before reform, it had relatively broad insurance coverage, in part because of a large union movement. And the state has a tradition of strong insurance regulation, which has probably made it easier to run a system that depends crucially on having regulators ride herd on insurers.
So national reform’s chances will be better if it contains elements lacking in Massachusetts — in particular, a real public option to keep insurers honest (and fend off charges that the individual mandate is just an insurance-industry profit grab). We can only hope that reports that the Obama administration is trying to block a public option are overblown.
Still, if the Massachusetts experience is any guide, health care reform will have broad public support once it’s in place and the scare stories are proved false. The new health care system will be criticized; people will demand changes and improvements; but only a small minority will want reform reversed.
This thing is going to work.
Sunday, October 25, 2009
Lucian Bebchuk says there's no need for the government to protect bondholders in a financial crisis:
Governments must not bail out bondholders, by Lucian Bebchuk, Commentary, Project Syndicate: A year after the United States government allowed ... Lehman Brothers to fail but then bailed out AIG,... a key question remains: when and how should authorities rescue financial institutions?
It is now widely expected that, when a financial institution is deemed “too big to fail”, governments will intervene if it gets into trouble. But how far should such interventions go? In contrast to the recent rash of bailouts,... the government’s safety net should never be extended to include the bondholders of such institutions.
In the past, government bailouts have typically protected all contributors of capital of a rescued bank other than shareholders. Shareholders were often required to suffer losses or were even wiped out, but bondholders were generally saved by the government’s infusion of cash. ... Bondholders were saved because governments generally chose to infuse cash in exchange for common or preferred shares – which are subordinate to bondholders’ claims – or to improve balance sheets by buying or guaranteeing the value of assets.
A government may wish to bail out a financial institution and provide protection to its creditors for two reasons. First,... a protective government umbrella might be necessary to prevent inefficient “runs” on the institution’s assets that could trigger similar runs at other institutions.
Second, most small creditors are ... unable to monitor and study the financial institution’s situation when agreeing to do business with it. To enable small creditors to use the financial system, it might be efficient for the government to guarantee (explicitly or implicitly) their claims.
But, while these considerations provide a basis for providing full protection to depositors and other depositor-like creditors..., they do not justify extending such protection to bondholders.
Unlike depositors, bondholders generally are not free to withdraw their capital on short notice. They are paid at a contractually specified time, which may be years away. Thus, if a financial firm appears to have difficulties, its bondholders cannot stage a run on its assets and how these bondholders fare cannot be expected to trigger runs by bondholders in other companies.
Moreover, when providing their capital to a financial firm, bondholders can generally be expected to obtain contractual terms that reflect the risks they face. Indeed, the need to compensate bondholders for risks could provide market discipline: when financial firms operate in ways that can be expected to produce increased risks down the road, they should expect to “pay” with, say, higher interest rates or tighter conditions.
But this source of market discipline would cease to work if the government’s protective umbrella were perceived to extend to bondholders... Thus, when a large financial firm runs into problems that require a government bailout, the government should be prepared to provide a safety net to depositors and depositor-like creditors, but ... the government should not provide funds (directly or indirectly) to increase the cushion available to bondholders.
Rather, bonds should be at least partly converted into equity capital, and any infusion of new capital by the government should be in exchange for securities that are senior to those of existing bondholders.
Governments should ... make their commitment to this approach clear in advance. ... This would not only eliminate some of the unnecessary costs of government bailouts, but would also reduce their incidence.
Anything that imposes the costs of the bailout on the people participating in the markets rather than on taxpayers without compromising the ability to protect the financial system (or, as claimed above, even enhancing the protective shield) is ok with me.
Lessons from the Great Depression:
The Roots of Protectionism in the Great Depression, by Laurent Belsie, NBER Reporter: The Great Depression was a breeding ground for protectionism. Output fell, prices declined, and unemployment rose, pressuring governments to do something to revive their economies, even if that meant limiting imports. But contrary to popular perception, some countries went much further down this protectionist road than others, according to "The Slide to Protectionism in the Great Depression: Who Succumbed and Why?" (NBER Working Paper No. 15142). Co-authors Barry Eichengreen and Douglas Irwin conclude that a key factor behind this variation in trade policies was nations' adherence to the gold standard. Those countries that clung to the gold standard were more likely to restrict trade than those that abandoned it.
Previous research has shown that countries that remained on the gold standard tended to endure sharper and longer downturns than those that allowed their currencies to depreciate. Eichengreen and Irwin offer an important trade-policy corollary: without the flexibility to depreciate their currencies, many gold-standard nations turned to trade restrictions in hopes that these would boost their domestic industries and curb unemployment. Thus, the 1930s' rush to protectionism was not so much a triumph of special-interest politics as it was a result of second-best macroeconomic policies, the authors write. Their study "suggests that had more countries been willing to abandon the gold standard and use monetary policy to counter the slump, fewer would have been driven to impose trade restrictions."
Saturday, October 24, 2009
Brian Hoyt of the World Bank's Crisis Talk blog says increasing trade tensions between the emerging markets of the Global South may prove to be problematic:
South-South Trade Tensions, by Brian Hoyt: John Authers argues that the newsworthy economic story of late isn't dollar weakness; rather, it is the weak renminbi:
Many, if not most, hopes for global recovery are pinned on China buying goods from countries such as Brazil. Commodity prices, a key driver of equities and forex rates, also move in response to the new orders received by China's manufacturers.This currency regime makes it far harder for such countries to sell to China. So it is no wonder that currencies are back at the top of the agenda.
...China has been building stronger trade relations with the Global South for quite some time. It is now South Africa's top export destination. But many of these partnerships are built around China purchasing commodities, and selling manufactured goods. With a weakening currency, China is likely to purchase fewer non-commodity goods from its trading partners. This may lead to growing trade tensions, particularly with countries who are not endowed with commodities.
Much attention has been paid to the importance of the economic relationship between China and the United States, or "Chimerica" (See this week's Economist cover story. Or Paul Krugman). Rising trade tensions between the two economic powers could spell doom for the global economy.
Yet, one should not discount the importance of emerging market trade relations, and the possible tensions that may arise. Today's Wall St Journal reports of Indian grievances toward China's trade practices:
Trade friction is growing between India and China. India leads all members of the World Trade Organization in antidumping cases against China. India has banned imports of Chinese toys, milk and chocolate, citing safety concerns...
Heavy industries minister Vilasrao Deshmukh recently told reporters, "We don't want India to be turned into a dumping ground". Yet, India's actions have had little effect on the growing trade imbalance between the two countries:
Alas, trade tensions are not only worrisome between the West and the East. They may prove problematic between the emerging markets of the Global South.
Why do some countries exhibit more social mobility than others?:
Getting ahead of ourselves, by Peter Browne, Inside Story: Last month, after Barack Obama invoked the American Dream at Wakefield High School in Virginia, Inside Story looked at what the statistics show about social mobility in western countries. ... In France, Italy, Britain and the United States, family background plays a very significant role in determining adult income; in Denmark, Norway, Finland and Canada the effect is much smaller. ... This puts the United States among a group of countries that are regarded as class-bound and stifling of individual initiative.
Our main source was a report by Anna Cristina d’Addio, a researcher in the OECD’s Directorate for Employment, Labour and Social Affairs. Now, two researchers in the organisation’s Economics Department, Orsetta Causa and Asa Johansson, have released a new report... Their broad conclusion is very similar to d’Addio’s. The more equal the socioeconomic and educational backgrounds of children in a given country, the greater the degree of social mobility...
Causa and Johansson identify education as the key factor. “Across European OECD countries covered by the analysis there is a substantial wage premium associated with growing up in a higher-educated family, whereas there is a penalty with growing up in a less-educated family, even after controlling for a number of individual characteristics.”...
But parents’ socioeconomic status obviously plays a vital role in school performance. ... Interestingly, it’s not necessarily only the child’s parents’ status that counts: “In over half of the OECD countries, including all the large continental European ones, students’ cognitive skills are more strongly influenced by the average socioeconomic status of parents of other students in the same school… than by their own parents’ socioeconomic status.”
This leads into what seems to me the most interesting of the report’s findings. According to the authors, the evidence suggests that “increasing the social mix within schools may increase performance of disadvantaged students with neutral or in some cases with positive effects on overall performance. Thus, policies aimed at encouraging such mix in neighborhoods may, therefore, play a role in mitigating inequalities.” This means that policies to encourage students from a range of backgrounds to attend the same schools ... will not only improve the performance of the least able students without lowering average performance, but could increase the overall performance of a classroom or a school. ...
Government policies have added to the problem in some cases, and helped to alleviate it in others, and not necessarily intentionally. Where enrolments in childcare and early childhood education are high, for instance,... students are less bound by their socioeconomic background. On the other hand, grouping students into different programs according to their proficiency correlates ... with less mobility. ...
Causa and Johansson ... see a role for urban planning and housing. “...policies aimed at increasing the social mix in neighbourhoods (for instance, by improving housing quality in deprived areas in order to attract middle-class families) could be instrumental for improving social mobility, especially in countries where the influence of the school socioeconomic environment on student performance is relatively large.”
Finally, two more observations that might be causing consternation among the authors’ colleagues in the OECD Economic Department:
More progressive income taxation and higher short-term unemployment benefits are associated with a looser link between parental background and both teenager’s cognitive skills and wages. This may reflect the tendency of well-targeted redistributive and income support policies to lower cross-sectional income inequality and poverty rates.
Labour market institutions that tend to compress wage distributions, such as a higher degree of unionisation and a greater coverage of collective wage agreements, appear to be associated with a looser link between parental educational achievement and children’s wages.
Causa and Johansson are saying that any measure that reduces inequality will make it easier for individuals to break free of the constraints of their backgrounds. It’s an enormous challenge for the United States and another warning for Australia.
Why State and Local Governments Need More Stimulus Funds, by Aaron Pacitti: Casey Mulligan disputes the idea that stimulus funds should be directed toward state and local governments because they are not shedding jobs as rapidly as the private sector. His analysis is generally correct—state and local government employment has not fallen as precipitously as private employment. This can be seen in Figure 1, which shows the year-over-year change in private, and state and local government employment from January 2007 to September 2009.
Friday, October 23, 2009
Ben Bernanke does not want to lose "the economic benefit of multi-function, international (financial) firms," so he is hesitant to break large banks into smaller sized institutions. I don't have much problem with the economics, if there are efficiencies that come with bank size we should exploit them, especially if breaking up banks into smaller entities does little to reduce systemic risk but instead simply fragments the problem into many more pieces (though I'd still like to know where the minimum efficient scale is, anything larger than that is unnecessary). Obtaining resolution authority for banks in the shadow system is also very important, so I don't disagree with the emphasis on this in Bernanke's remarks.
But there seems to be the view that if they have resolution authority, higher capital requirements, etc., that will make the probability of a major breakdown small enough so that the expected benefits of size outweigh the expected costs. While I agree that obtaining resolution authority and other regulatory change is extremely important, I wouldn't bet my house, or housing and asset markets more generally, that this will eliminate the chance of a major breakdown, or make the chance small enough to justify huge, powerful, market-dominating institutions.
I would like to see more effort to measure and regulate connectedness within the system (which can be very high even with banks broken into smaller pieces) since that would add another layer of protection, the degree of leverage should come under scrutiny as well, and I would also like to see more attention to the political risks (e.g. capture of legislators and hence regulation) posed by large financial firms:
Bernanke: Smaller Banks Not Necessarily the Answer for ‘Too Big to Fail’ Dilemma, by David Wessel, WSJ: Mervyn King, governor of the Bank of England, says the solution to banks that are “too big to fail” is to have smaller banks. But Ben Bernanke, chairman of the U.S. Federal Reserve, says he isn’t convinced that’s the best answer.
Mr. Bernanke ... said he would prefer “a more subtle approach without losing the economic benefit of multi-function, international (financial) firms.” ...
Mr. Bernanke suggested alternatives such as higher capital requirements against bank trading books, higher capital for “systemically important” institutions and a congressionally created process for coping with failing big financial firms in ways other than bankruptcy or bail out.
He also expressed interest in what have been dubbed “living wills” — plans that big banks would have to maintain for winding down their operations.
The goal, Mr. Bernanke said, is to reduce “the artificial incentives for size” — including the incentive to grow large so that government bailouts are anticipated — so that financial firms instead grow to a size that is economically valuable in a global economy populated by large multinational companies.
The Fed chairman did emphasize that supervisors should have the authority and willingness to tell the management of a large institution, where appropriate, that it cannot expand unless it improves its management and risk-management capabilities.
Both in answering the question and in his prepared text, Mr. Bernanke again beseeched Congress to act soon to give regulators “resolution authority” to cope with the imminent collapse of a big financial firm other than a bank, and to address other vulnerabilities in the regulatory regime exposed during the crisis.
"China is stealing other peoples’ jobs":
The Chinese Disconnect, by Paul Krugman, Commentary, NY Times: Senior monetary officials usually talk in code. So when Ben Bernanke ... spoke recently about Asia, international imbalances and the financial crisis, he didn’t specifically criticize China’s outrageous currency policy.
But he didn’t have to: everyone got the subtext. China’s bad behavior is posing a growing threat to the rest of the world economy. The only question now is what the world — and, in particular, the United States — will do about it.
Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.
There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. ... The crucial question, however, is whether the target value of the yuan is reasonable. ...
Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.
Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.
But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.
And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.
So what are we going to do?
U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?
The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.
In fact, some countries, most notably Switzerland, have been trying to support their economies by selling their own currencies on the foreign exchange market. The United States, mainly for diplomatic reasons, can’t do this; but if the Chinese decide to do it on our behalf, we should send them a thank-you note.
The point is that with the world economy still in a precarious state, beggar-thy-neighbor policies by major players can’t be tolerated. Something must be done about China’s currency.
Barry Eichengreen says the dollar isn't dead yet:
The death-defying dollar, by Barry Eichengreen, Commentary, Project Syndicate: The blogosphere is abuzz with reports of the dollar’s looming demise. The greenback has fallen against the euro by nearly 15% since the beginning of the summer. Central banks have reportedly slowed their accumulation of dollars in favor of other currencies. ...
The first thing to say about this is that one should be skeptical about ... predictions ... concerning the near term. Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months. ...
Over periods of several years, our models do better. Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness.
The question is, Weakness against what? Not against the euro, which is already expensive and is the currency of an economy with banking and structural problems that are even more serious than those of the US. Not against the yen, which is the currency of an economy that refuses to grow.
Thus, for the dollar to depreciate further, it will have to depreciate against the currencies of China and other emerging markets. Their intervention in recent weeks shows a reluctance to let this happen. But their choice boils down to buying US dollars or buying US goods. The first option is a losing proposition.
In the longer run, Opec will shift to pricing petroleum in a basket of currencies. ... It hardly makes sense for it to denominate oil prices in the currency of only one of its customers. And central banks, when deciding what to hold as reserves, will surely put somewhat fewer of their eggs in the dollar basket.
Beyond this, the dollar isn’t going anywhere. It is not about to be replaced by the euro or the yen, given that both Europe and Japan have serious economic problems of their own. The renminbi is coming, but not before 2020, by which time Shanghai will have become a first-class international financial center. And, even then, the renminbi will presumably share the international stage with the dollar, not replace it.
The one thing that could precipitate the demise of the dollar would be reckless economic mismanagement in the US. One popular scenario is chronic inflation. But this is implausible. ... There may be a temptation to inflate away debt held by foreigners, but the fact is that the majority of US debt is held by Americans, who would constitute a strong constituency opposing the policy.
The other scenario is that US budget deficits continue to run out of control. Predictions of outright default are far-fetched. But high debts will mean high taxes. The combination of loose fiscal policy and tight monetary policy will mean high interest rates, sluggish investment, and slow growth. Foreigners – and residents – might well grow disenchanted with the currency of an economy with these characteristics.
Mark Twain ... once responded to accounts of his ill health by writing that “reports of my death are greatly exaggerated.” He might have been speaking about the dollar. For the moment, the patient is stable, external symptoms notwithstanding. But there will be grounds for worry if he doesn’t commit to a healthier lifestyle.
Thursday, October 22, 2009
Each year, Tim Duy organizes the Oregon Economic Forum, and this year he invited David Altig of the Atlanta Fed to talk about monetary policy. I'll be discussing fiscal policy, and one of the questions I'll address is whether more stimulus is needed. The poor condition of job markets will be a key part of that discussion, and this post of David's at macroblog provides additional evidence that the odds of a jobless recovery are increasing:
"Companies across the economy are holding off on hiring even as the profit outlook improves, amid economic uncertainty and their own success at raising productivity in rough waters.
"Hiring always lags behind in economic recoveries, but the outlook this time is worse, many economists say. Most forecasters now expect a prolonged period of high unemployment, even though the government is expected to report next week that the economy grew in the third quarter, after four quarters of contraction."
I'd like to be able to contradict what most forecasters expect, but we at the Atlanta Fed have been building the case for a similar outcome on macroblog. Here are few salient points from previous posts.
Job opportunities are scarce. (Oct. 14, 2009)
"At the end of August there were estimated to be fewer than 2.4 million job openings, equal to only 1.8 percent of the total filled and unfilled positions—a new record low."
This development could, of course, turn around as business activity picks up, but there is more than a little evidence that some structural impediments are afoot.
Job losses have been disproportionately concentrated in small businesses. (Oct. 6, 2009)
As Melinda Pitts pointed out a few weeks back, businesses with fewer than 50 employees account for about one third of net employment gains in expansions. They have accounted for about 45 percent of job losses since the beginning of this recession. Given that these are the types of businesses most likely to be dependent on bank lending—and given that bank lending does not appear poised for a rapid return to being robust—the prognosis for an employment recovery in these businesses is a question mark.
The share of workers reporting that they have been involuntarily cut back to part-time is at a recorded high. (Aug. 14, 2009)
"… the increase in people reporting that they are involuntarily working part-time rather than full-time is considerably higher in this recession than in past recessions. Although the increase in these workers has moderated some since the spring of this year, the number of people in the category of working part-time for economic reasons remains at 8.8 million, well above the level of past contractions in both absolute and relative terms."
One potential implication of this fact is that firms probably have the capacity to expand production without hiring new workers (or increasing worker productivity). All these firms have to do is give more hours to existing workers, who have indicated they would be plenty eager to have them. Good for them—and good for GDP growth—but not much help on the employment front.
Here is one additional concern that we have not previously emphasized.
The percentage of employee separations labeled permanent is at a recorded high.
Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.
The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:
Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing.
Jeff Sachs says "America has acted irresponsibly since signing the climate treaty in 1992":
King coal's climate policy: Will the US prove to be the world's last holdout?, by Jeffrey D. Sachs, Commentary, Project Syndicate: The United Nations Climate Change Treaty, signed in 1992, committed the world to “avoiding dangerous anthropogenic interference in the climate system.” Yet, since that time, greenhouse-gas emissions have continued to soar.
The United States has proved to be the biggest laggard in the world, refusing to sign the 1997 Kyoto Protocol or to adopt any effective domestic emissions controls. ... There are several reasons for US inaction – including ideology and scientific ignorance – but a lot comes down to one word: coal. No fewer than 25 states produce coal, which not only generates income, jobs, and tax revenue, but also provides a disproportionately large share of their energy. ...
Since addressing climate change is first and foremost directed at reduced emissions from coal – the most carbon-intensive of all fuels – America’s coal states are especially fearful about the economic implications of any controls (though the oil and automobile industries are not far behind). ...
Under the US Constitution, domestic legislation ... requires a simple majority in both the House of Representatives and the Senate... Getting 50 votes for a climate-change bill (with a tie vote broken by the vice president) is almost certain.
But opponents of legislation can threaten to filibuster..., which can be ended only if 60 senators support bringing the legislation to a vote. ... Securing 60 votes is a steep hill to climb. ...[O]ne analysis counts 50 likely Democratic “Yes” votes and 34 Republican “No” votes, leaving 16 votes still in play. Ten of the swing votes are Democrats, mainly from coal states; the other six are Republicans who conceivably could vote with the president and the Democratic majority.
Until recently, many believed that China and India would be the real holdouts in the global climate-change negotiations. Yet China has announced a set of major initiatives – in solar, wind, nuclear, and carbon-capture technologies – to reduce its economy’s greenhouse-gas intensity.
India, long feared to be a spoiler, has said that it is ready to adopt a significant national action plan... These actions put the US under growing pressure to act. With developing countries displaying their readiness to reach a global deal, could the US Senate really prove to be the world’s last great holdout?
Obama has tools at his command to bring the US into the global mainstream on climate change. First, he is negotiating side deals with holdout senators to cushion the economic impact on coal states and to increase US investments in the research and development, and eventually adoption, of clean-coal technologies.
Second, he can command the Environmental Protection Agency to impose administrative controls on coal plants and automobile producers... The administrative route might turn out to be even more important than the legislative route.
The politics of the US Senate should not obscure the larger point: America has acted irresponsibly since signing the climate treaty in 1992. It is the world’s largest and most powerful country, and the one most responsible for the climate change to this point, it has behaved without any sense of duty – to its own citizens, to the world, and to future generations.
Even coal-state senators should be ashamed. Sure, their states need some extra help, but narrow interests should not be permitted to endanger our planet’s future. It is time for the US to rejoin the global family.
Wednesday, October 21, 2009
- Could a Land Tax Support the Operations of Government? - Miller-McCune
- Now Entering the Blogosphere - CAScade
- Top China banker warns on asset bubbles - Calculated Risk
- Big exporters don’t pass through exchange rate movements - voxeu.org
- Banks Must Protect Consumers to Protect Themselves - New Deal 2.0
- Modeling the Pundit’s Dilemma - Cheap Talk
- Don't Leave the externalities of journalism to other fields - Richard H. Serlin
- Free Exchange - links
A spokesman for Goldman Sachs defends their pay practices:
...[A]ccording to a Goldman adviser, Wall Street’s record pay is necessary “to achieve greater prosperity and opportunity for all”:
A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths ... said yesterday at a panel discussion hosted by St. Paul’s Cathedral in London.
At the same time that Wall Street’s pay has skyrocketed, pay cuts in other sectors “are occurring more frequently than at any time since the Great Depression.”...
A defense of inequality and trickle down in one statement. That's a political winner. By the way, there's little evidence for either claim. Trickle down doesn't work, and recent increases in inequality have not led to higher economic growth than we had before.
I'm not sure why this caught my eye:
I once heard from a Russian reporter about her early days on the job. “Whenever we read an article about the health dangers of butter, we would immediately run out and buy as much butter as we could find,” she told me. “We knew it meant there was about to be a butter shortage.” In other words, Russians looked only for the agenda, the motivation behind the assertion. The actual truth was irrelevant.
It seems that more and more I am also looking for the agenda behind what people write, even for news stories, academic communication (especially outside of journals), etc. I don't know if this is getting worse, or if I am simply finally waking up to the way things have always worked. Probably the latter.
Global macroeconomic imbalances: G20 leaders must back up their rhetoric with deeds, by Eswar Prasad, Commentary, Financial Times: The financial crisis has taught us a painful lesson that global macroeconomic imbalances can wreak enormous damage on the world economy. Indeed, the centerpiece of the recent G20 Summit in Pittsburgh was agreement on a framework for balanced and sustainable growth to forestall a resurgence of imbalances as the economic recovery gets underway. ...G20 leaders gave the IMF a mandate to manage this framework by providing hard-nosed evaluations of their countries’ macroeconomic policies.
Experience suggests that grand promises to implement policies that are in the collective global interest can’t be taken seriously without an effective enforcement mechanism. ... The IMF has no real levers when it comes to the leading G20 economies, especially since they are the major shareholders in the institution. Moral suasion and name-to-shame approaches don’t work well as the large economies tend to simply brush off external criticism of their policies.
There is a simple approach that has real consequences, would be straightforward to implement and allows G20 countries to make enforceable policy commitments. It involves Special Drawing Rights, essentially an artificial currency created at the IMF and distributed to countries in rough proportion to their economic size. The total stock of SDRs is now close to $300bn, a sizable chunk of money.
The scheme would work as follows. The G20, in consultation with the IMF, develops a simple and transparent set of rules for governments on policies that could contribute to global imbalances - for instance, that government budget deficits and current account balances (deficits or surpluses) should be kept below 3 per cent of national GDP. Each country posts a commitment bond amounting to a minimum of 25 per cent of its SDR holdings to back up its commitments to those objectives.
Since it is not easy, even with the best of policies, to turn around the factors underlying imbalances within a short period, commitments to policy objectives would be made over a five year horizon. ... Failure to meet the targets would mean a forfeiture of the bond... The actual cost would not be large. China, for instance, now has an allocation of 7bn SDRs and 25 per cent of that would amount to less than $3bn. Still, the symbolic effect of being levied an SDR penalty for running bad economic policies would be huge. ...
This approach would shift the discussion from contentious arguments about current policies to a focus on outcomes. For instance, China has consistently maintained that its current account surplus reflects structural problems in its economy and has nothing to do with its exchange rate policy. Who could quibble with methods so long as China commits to reducing its current account surplus and succeeds in putting its economy on a trajectory to get it below 3 per cent of GDP in the next 5 years...?
What happens to SDRs that get docked if countries don’t hit their targets? These SDRs would be distributed among low income countries. To get incentives right, only those low-income countries that meet minimum standards in terms of their macro policies would be eligible for this redistribution. This way, the IMF could finally offer carrots to poor countries for good policies rather than just sticks for bad policies. Any SDR redistributions to small poor economies ... would be morally justified - instability caused by bad policies in the larger and richer economies tends to hurt these vulnerable and innocent bystanders disproportionately.
The G20 commitment to tackling global macroeconomic imbalances is laudable. G20 leaders must now be ... ready to pay the price for breaking their commitments.
Five years seems too short of a time period given the large adjustment some countries would have to make to get to a 3% target, but I can't imagine this being implemented in any case. They'd never get past the contentious, endless discussions over what the targets should be, how they should be defined, the acceptable range in each case, and so on.
I suppose we could think of this as a tax on excessive contributions to global imbalances (solving an externality problem that is present when individual countries do not consider the effect of their policies might have on other countries except to the extent that it feeds back on them). Maybe we could try a cap-and-trade system instead. Cap global imbalances at some level, and then have countries buy and sell permits in order to deviate from their allotment of the total (the initial permits could be distributed by auction with the proceeds distributed among countries in some way, or simply given away). Yeah, that'll work.
Felix Salmon wonders what Hank Paulson was thinking. Me too:
The secret Paulson-Goldman meeting, by Felix Salmon: Andrew Ross Sorkin’s new book is out today, and breaks some pretty stunning news, dating from the end of June, 2008. At this point, we’re still months away from the now-famous but then-secret waiver, issued in mid-September, which allowed Hank Paulson to talk to Goldman Sachs; he’d promised not to do that when he moved from Goldman to Treasury.
But it turns out that Paulson just happened to be in Moscow at the same time that Goldman’s board of directors was having dinner there with Mikhail Gorbachev. (You know, as one does.) Take it away, Andrew:
When Paulson learned that Goldman’s board would be in Moscow at the same time as him, he had [Treasury chief of staff] Jim Wilkinson organize a meeting with them. Nothing formal, purely social — for old times’ sake.For f#&%’s sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow?For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink’s BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury’s general counsel. Bob Hoyt, who wasn’t enamored of the “optics” of such a meeting, said that as long as it remained a “social event,” it wouldn’t run afoul of the ethics guidelines.Still, Wilkinson had told [Goldman chief of staff John] Rogers, “Let’s keep this quiet,” as the two coordinated the details. They agreed that Goldman’s directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the “social event” on his official calendar…“Come on in,” a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some.For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech.
How on earth did Paulson think this was OK? Goldman Sachs was a hugely powerful for-profit investment bank, and there he is, giving private chapter and verse on his opinions about the US and global economy, talking about internal Treasury matters, and previewing an upcoming (and surely market-moving) speech. All in secret, at a “social event” which somehow got kept off his official calendar. Oh, yes, and one other thing — the whole shebang took place in the Moscow Marriott Grand Hotel, in the context of Goldman directors joking about how all the Moscow hotels were surely bugged.
This is sleazy in the extreme, and will only serve to heighten suspicions that Paulson’s Treasury was rigging the game in favor of Goldman all along. ...
Paulson didn’t have this meeting out of fear or necessity... There was nothing in the way of extenuating circumstances which could possibly justify the secret rendezvous. This is definitely a situation where Wilkinson should have pushed back and said no way — but it’s hard to say no to Hank Paulson. Whose reputation has now taken yet another serious lurch downwards.
More from Felix Salmon:
How Paulson gave Goldman the Lehman heads-up, by Felix Salmon: The secret Paulson-Goldman meeting wasn’t the only time that Hank Paulson treated his buddies at Goldman Sachs especially well while at Treasury. In fact, it wasn’t the only time he did so before he got the now-famous waiver.
A bit further on in the Sorkin book, while Paulson is trying to work out what should be done with an imploding Lehman Brothers, we find this:
If all that weren’t enough to deal with, [Lehman president Bart] McDade had just had a baffling conversation with [CEO Dick] Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman’s confidential numbers, courtesy of Goldman Sachs.McDade, though never much of a Goldman conspiracy theorist, found Fuld’s report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman’s head of capital markets. “I’m following up at Hank’s request,” he began.After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and getting them to sign a confidentiality agreement.“This is coming directly from Paulson,” he explained.
In many ways, this is worse than Paulson’s meeting with Goldman’s board: in this case, Paulson is forcing Lehman to open its books fully to a direct competitor, for no obvious reason. And in this case it’s not at all obvious that Paulson got a sign off from Treasury’s general counsel before doing so. ... If the Moscow meeting wasn’t enough to precipitate some kind of Congressional investigation of Paulson, this should be.
Update: There’s more, a few pages later:
As they were making yet another pass through the earnings call script, Kirk’s cell phone rang. It was Harvey Schwartz from Goldman Sachs, phoning about the confidentiality agreement that Kirk was preparing. Before Schwartz began to discuss that matter, however, he said that he had something important to tell Kirk: “For the avoidance of doubt, Goldman Sachs does not have a client. We are doing this as principal.”For a moment Kirk paused, gradually processing what Schwartz had just said.“Really?” he asked, trying to keep the shock out of his voice. Goldman is the buyer?“Okay. I have to call you back,” Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, “Guys, they don’t have a client!”…McDade, reasonably, was concerned about sharing information with a direct competitor: How much did they really want to divulge? At the same time, he felt they couldn’t take a stand against a plan that he believed had originated with Paulson…McDade, turning back to his preparations for the fast-approaching call, made his position clear: “We were told by Hank Paulson to let them in the door. We’re going to let them in the door.”
There are questions here that need to be answered about the relationship between the Treasury, Paulson in particular, and Goldman Sachs, who was, we are told, "effectively advising Treasury."