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Thursday, June 21, 2012

Links for 06-21-2012

    Posted by on Thursday, June 21, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (122) 

    Wednesday, June 20, 2012

    Fed Watch: Where to Next?

    Tim Duy yet again (which is good since I'm having severe connectivity issues):

    Where to Next?, by Tim Duy: This will be my final FOMC post-mortem. At least I hope so. I remain as frustrated at the outcome of this meeting as in the run-up to the meeting. Reviewing what I already wrote as well as comments across the web leaves me with this:

    1. The general argument that supported expectations of QE3 was broadly correct. The basis of this argument was a deterioration in the forecast matched with moderating inflation data and increasing downside risks. A solid argument in light of speeches by Vice Chair Janet Yellen and San Francisco President John WIlliams. And this line of thought was consistent with the Fed's actual projections. The Fed, however, did not follow through on their own projections, which is frustrating. It strikes me as a sloppy communications strategy.
    2. The Fed wants to see more data before making another move. This seemed to be evident in Bernanke's press conference. I suspected this might be the case, but am surprised that while they are sufficiently uncertain of the data to forestall QE, they were certain enough to mark down theirforecasts.
    3. The labor market remains a critical indicator. It is clear from the final sentence that sustained progress in labor market conditions would prevent additional easing, and vice versa. At least this seems clear - arguably, by this metric the Fed would already embraced QE3. Again, they want more data. The possibility that seasonal adjustment issues are at play in the data weighs heavily on their minds.
    4. The Fed is very uncertain about the impacts of additional QE. This uncertainty is probably the most significant impediment to additional easing. It is really the only explanation for Bernanke's hesitation to do more now; clearly the forecast justifies additional action as it indicates the Fed does not expect to meet either its employment or inflation mandates.
    5. The form of additional easing remains uncertain. Like other officials, Bernanke did not close the door on additional asset purchases. I noted earlier, however, that the statement no longersingles out balance sheet operations as the next tool. Arguably, this change was simply necessary to eliminate the "composition" of the balance sheet option, as the Fed's ability to change the composition via twisting will expire at the end of the year. That said, they could still change the composition by shifting between Treasuries and mortgage assets, so the composition tools is not necessarily dead. Or they could be signalling an intention to use communications tools as an alternative to QE; Yellen has suggested this possibility.  My baseline scenario is that if additional easing is deemed necessary, asset purchases will be the likely option. Still, I think it is worth being on the look-out for other options.

    Bottom Line: It is as if at each meeting Federal Reserve Chairman Ben Bernanke moves half-way again to additional easing, but never seems to get there. It is one of those philosophical problems. Maybe next time he will make it. If the employment data falters. And he believes the data. And he believe that QE will be effective. And if a blessing of unicorns marches down Constitution Avenue.

      Posted by on Wednesday, June 20, 2012 at 04:03 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (14) 

      Fed Watch: This Is Just Sad

      Tim Duy once again:

      This Is Just Sad, by Tim Duy: The FOMC just released their statement, dashing hopes for QE3. We are still waiting on the press conference, but some quick thoughts. First, the Fed does not appear to be particularly worried by recent weak data:

      Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

      I suspect that the weak tone to recent data was countered by the relatively solid anecdotal tone of the Beige Book. They do not appear to have marked down their forecasts as substantially as many believed. Also, they may want additional data to confirm any recent weakness.

      Second, they continue to state the case for more easing:

      Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

      Yet, despite making a clear case for aggressive policy, they still don't follow it to its logical conclusion. This is indeed maddening and is the primary reason market participants expect sizable QE is coming. The FOMC sets ups the justification for easing meeting after meeting, and then simply does not deliver.

      Third, consider the final line:

      The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

      Now compare it to April:

      The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

      In April they specifically pointed to the balance sheet as the tool of choice. Now they just promise further action. Sounds like they intentionally want to take the focus off the balance sheet. This could be a very important signal about the direction of future policy. Do they view further QE as largely ineffective given low interest rates and constrained credit channels, and now reserve its use for only the most dire circumstances? If not the balance sheet, then what? Communication? Perhaps I am reading too much into this line, but it seems to be a significant change. I sure hope some reporter asks about this line at the press conference. Hint, hint.

      Finally, we still have a dissenter, Richmond Federal Reserve President Jeffrey Lacker. The tone of the data was insufficient to change his mind that Operation Twist should end as scheduled.

      Bottom Line: Internally at the Fed, the risk/reward trade off still does not favor additional QE.

        Posted by on Wednesday, June 20, 2012 at 01:53 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (58) 

        Fed Watch: Twist It Is

        Tim Duy:

        Twist It Is, by Tim Duy: The FOMC just released their statement, dashing hopes for QE3. We are still waiting on the press conference, but some quick thoughts. First, the Fed does not appear to be particularly worried by recent weak data:

        Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

        I suspect that the weak tone to recent data was countered by the relatively solid anecdotal tone of the Beige Book. They do not appear to have marked down their forecasts as substantially as many believed. Also, they may want additional data to confirm any recent weakness.

        Second, they continue to state the case for more easing:

        Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

        Yet, despite making a clear case for aggressive policy, they still don't follow it to its logical conclusion. This is indeed maddening and is the primary reason market participants expect sizable QE is coming. The FOMC sets ups the justification for easing meeting after meeting, and then simply does not deliver.

        Third, consider the final line:

        The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

        Now compare it to April:

        The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

        In April they specifically pointed to the balance sheet as the tool of choice. Now they just promise further action. Sounds like they intentionally want to take the focus off the balance sheet. This could be a very important signal about the direction of future policy. Do they view further QE as largely ineffective given low interest rates and constrained credit channels, and now reserve its use for only the most dire circumstances? If not the balance sheet, then what? Communication? Perhaps I am reading too much into this line, but it seems to be a significant change. I sure hope some reporter asks about this line at the press conference. Hint, hint.

        Finally, we still have a dissenter, Richmond Federal Reserve President Jeffrey Lacker. The tone of the data was insufficient to change his mind that Operation Twist should end as scheduled.

        Bottom Line: Internally at the Fed, the risk/reward trade off still does not favor additional QE.

          Posted by on Wednesday, June 20, 2012 at 01:48 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (2) 

          Peak Oil and Price Incentives

          Jim Hamilton, in a post called Peak oil and price incentives:

          ... We like to think that the reason we enjoy our high standards of living is because we have been so clever at figuring out how to use the world's available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain. Optimists may expect the next century and a half to look like the last. Benes and coauthors are suggesting that instead we should perhaps expect the next decade to look like the last.

            Posted by on Wednesday, June 20, 2012 at 03:33 AM in Economics, Oil | Permalink  Comments (57) 

            The Pumwani Maternity Ward

            Today we visited a maternity ward in a poor area of Nairobi to get a sense of the scale of the population explosion in Kenya, and the level of care for this population.

            The charge for maternity care at this hospital is 3,000 shillings for a normal birth, and 6,000 shillings for a C-section, plus 400 shillings per day for room charges. (If you cannot pay at the end, they keep you for two weeks -- room charges accumulate -- then eventually release you. About 2% do not pay, and that comes to around a million shillings per month.)

            Maternity Ward 004Entrance

            I was interested in a comment made during a presentation prior to the visit that health care for the poor is allocated by a voucher system. The vouchers cost 100 shillings, or a $1.25, That doesn't seem like a lot, but the population we visited yesterday, for example, is excluded by this practice (secondary options for care are not very good).

            Maternity Ward 022Post-natal training

            I asked the government official making the presentation why they chose to allocate care in this way. The money they collect is nothing -- that can't be it -- it seems like an intentional exclusion of the lowest income population. The answer: they can't afford to cover everyone. Then why exclude this population? Why not adopt a different allocation mechanism that targets very specific areas of need? Why do they think this is the best way to allocate the money? There was an answer, but it didn't really address the question, and it left as many questions as it answered.

            Maternity Ward 008These will be occupied soon

            I was left wondering how the voucher system came to be in the first place. I asked, again words were spoken, but there was no answer. Is this, for example, the result of some donor saying funds will be given, and insisting on an allocation mechanism that involves vouchers (it worked in Kenya, and it can work in the US too!)? Was it from economists in Kenya? I wish I had the answers.

            Maternity Ward 017I bet this is really effective

            Another comment made by the director of the maternity ward interested me as well. We were told that every other hospital gets 2 million shillings per month to cover maintenance, gardening, and other expenses, but this one does not. We asked why, and the answer was: he wished he could tell us, but he didn't know. I suspect the money is ending up in someone's pocket, but who knows? Another puzzle is that they receive very little donation money (though this could have been a pitch to donors that exaggerated the conditions so that we would write about it -- there was no way to tell). But this is a place where donations could do a whole lot of good, and it's hard to imagine that some NGO wouldn't want to do this (there is a funder on the trip who thought donors should be salivating over this place). But donors do check before giving money, especially very large sums, and if the money is not epected to end up where it was intended to go, then they would be hesitant to begin a relationship. We were all puzzled by why donors shied away, and we tried hard to find out why. But, once again, there was no good answer, only more questions.

            I'm finding that a lot here.

            [We also had a presentation on female genital mutilation, or female circumcision as some insist on calling it, and it seemed to me it could be characterized, at least in part, as a multiple equilibrium, collective action problem with tipping points. So I asked what they knew about tipping points -- the point where the social pressure switches from doing it to not having it done as fewer and fewer have the procedure done to them, but that will have to wait -- we have to catch a plane to Lake Victoria to meet the CDC and see other things, like hippos coming to get water (apparently like clockwork) and we depart at 6 am. That's in five hours.]

              Posted by on Wednesday, June 20, 2012 at 03:24 AM in Development, Economics, Health Care | Permalink  Comments (9) 

              Africa Progress Report

              A progress report on jobs, justice, and equity for Africa:

              The Africa Progress Panel Report — Jobs, Justice and Equity for Africa , by Kevin Watkins, Brookings: In the bullish environment at last week’s World Economic Forum (WEF) on Africa in Addis Ababa, the launch of the Africa Progress Panel report stood out as an island of balanced reflection and cautious optimism.
              Chaired by the former UN Secretary General Kofi Annan, the Africa Progress Panel (APP) includes leaders from government, business and civil society. This year’s report, focused on jobs, justice and equity. The panel takes a long, hard look at Africa’s recent record on economic growth, democracy and governance. It provides a hefty dose of good news. More than any other region, Africa’s economies have demonstrated great resilience in withstanding the worst effects of the global recession. The WEF host country, Ethiopia, has been posting higher growth rates than China; Mozambique has been out-performing India. Over 70 percent of the region’s population lives in countries growing in excess of 4 percent a year.
              The record on democracy and governance is also encouraging. Multi-party democracy has emerged intact from disputed elections in Cote d’Ivoire and Senegal. Several governments have moved to strengthen anti-corruption measures. And budget transparency is improving.
              Set against the positives, the APP does not pull its punches on the downside of the progress report. Launching the report, Kofi Annan told a crowded room of journalists that African governments were failing to tackle what he described as “ethically indefensible and economically inefficient” inequalities. “Disparities in basic life chances – for health, education and participation in society – are preventing millions of Africans from realizing their potential, holding back social and economic progress in the process,” Mr. Annan said.
              While the talk in the WEF corridors has been all about the investment opportunities created by growth, the expansion of the middle class and commercial agriculture, the APP turns the spotlight on issues that are conspicuously absent from the wider WEF agenda. It warns that much of the economic growth of the past decade has been jobless, raising the specter of rising youth unemployment. The report cautions that restricted access to education and low levels of learning achievement are reinforcing social disparities and hampering employment creation. And, citing data from research at Brookings, it says that claims made about the growth of an African middle class have been exaggerated.
              Taking up a theme that NGOs like Oxfam have addressed, the report also urges African governments to draw a sharper distinction between productive foreign investment in agriculture and what Mr. Annan and his co-panelist and celebrity activist, Bob Geldof, described as speculative land grabs. The report warns that failure to prioritize smallholder agriculture will leave millions of Africans trapped in a cycle of poverty and food insecurity.
              Looking ahead, the report calls for a renewed focus on equity and jobs creation, with education placed at the center of national strategies...

                Posted by on Wednesday, June 20, 2012 at 03:06 AM in Economics, Kenya | Permalink  Comments (16) 

                Brad DeLong is Shaken to the Core

                Brad DeLong:

                I used to--six years ago--be certain that ... economics had a powerful technocratic core and a powerful set of analytical tools that helped to make sense of the world.
                But the treatment that the world has gotten from the Lucases, Cochranes, Famas, Kocherlakotas, and many others, not to mention the Prescotts--none of whom seems to have made any effort to mark their prejudices to reality--has shaken my confidence to the core. They seemed to me and seem to me to have simply not done their homework, and not be trying to do their homework.

                  Posted by on Wednesday, June 20, 2012 at 12:24 AM in Economics, Methodology | Permalink  Comments (100) 

                  Links for 06-20-2012

                    Posted by on Wednesday, June 20, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (66) 

                    Tuesday, June 19, 2012

                    Extreme Politics Will Make the U.S. the Biggest Loser

                    New column:

                    Extreme Politics Will Make the U.S. the Biggest Loser

                    Republican extremism is hurting us in several ways.

                      Posted by on Tuesday, June 19, 2012 at 04:32 AM in Economics, Politics | Permalink  Comments (69) 

                      Kenya's Kibera Slum

                      The International Reporting Project took us to the Kibera slum today, everyone here says it's the largest slum in the world (though Wikipedia says it's third), and we heard presentations from youth groups, Doctors Without Borders, and others. We also broke into small groups and interviewed families -- we were free to ask anything we wanted -- about half of which were HIV positive.

                      Kenya 1672

                      It's hard to understand how many of them make it at all. Rent for a dirt-walled shack is 1500 shillings per month (the exchange rate is approximately 80 to 1 so this is around $18.75 per month). All of the people we talked to were casual laborers, and they found work when they could doing things such as knocking on doors and asking if people needed their clothes washed. But the income they bring home, at least as far as I could tell, was hardly enough to pay the rent, let alone buy food (many ate once per day, one woman said she waited until just before bedtime to feed her kids since they didn't sleep well if they were fed earlier).

                      Kenya 1630The Sewage System

                      As for infrastructure, they get water from the government twice per week, maybe (Tuesdays and Sundays). At other times they have to buy it. If they want to use anything but a hole in the ground to go to the bathroom, they must pay 10 shillings (only 6 toilets are plumbed for 1 million people, the sewage dumps into trenches running along the roads -- even the outhouses, a generous term for what they actually are -- were shared by 50 or more families).

                      Kenya 1676
                      He has aids, his wife is virus free

                      Nevertheless, the economy was more vibrant than I expected. There is the small economy inside of the slum as they trade with each other, but more importantly there is a huge daily flow of people out of the slums to do work in the industrial and service sectors (mostly by foot, and they walk long distances daily).

                      Kenya 1678
                      Food Stand

                      The money from working, when they can, comes back to the slums, but there are all sorts of corrupt institutions that take it right back out. Because of this, e.g. making slum residents pay exorbitant amounts for water and charging rent on land that is supposed to be free, the money they bring home (and money from aid programs, etc.) flows back out of the slum, and guess who loses on the exchange due to the unequal power relationships in every transaction they face?  (When asked, they say the rent is for the structures, not the land, but one of the reporters on the trip made a good point -- how did the landlord get control of the land in the slum so that they could put these shacks on it? What power enforced and allowed them to control land that is supposed to be free? What corruption allows this?)  

                      Kenya 1632School

                      Another disappointment is that they seem to understand that schooling is one way out. I asked lots of kids this question in the home visits, and without prompting they all said school was their best hope (one 8 year old boy wanted to be a pilot). But school is not free, they must pay, so the kids only get spotty lessons here and there, if at all (there was some confusion here, some said elementary school was free, but most don't go in any case). There are a few schools run by NGOs, but the kids must perform well enough to be accepted and the need far outweighs the opportunity. Nevertheless, for those who do get in you could see that they looked healthier and happier, perhaps due in no small part to the fact that they are fed once a day at school (for one child we talked to, and surely more, that was pretty much it for the day).

                      Kenya 1628
                      Trees are used for fuel, and are mostly gone

                      Kenya 1668
                      Charcoal is used too -- if you have 35-45 shillings

                      One final observation. At first I thought the key to helping these people would be to create more jobs in the industrial sector -- to bring them regular, dependable incomes from this low-skill employment. There are also huge infrastructure needs that go unmet. For example, when asked why they only get water from the government twice per week, they answer that there's not enough water to serve all the slums every day, so the government must ration. But from what I understand, there's plenty of water, it's the infrastructure to supply it that is missing (a lot of water is diverted into flower production). So jobs and basic social services are a first priority.

                      Kenya 1660
                      Those solid walls that landlord build
                      (fleas, bedbugs, etc. hide in the walls)

                      But I'm starting to understand how corruption interferes with the development process. There are, for example, many phantom schools -- schools on the books that were paid for by government money, but the schools don't actually exist. The same is true for health clinics, and for other money intended to help the poor. So its easy to call for more social services, and the government sometimes answers, but how much of it reaches its intended destination? I don't know the exact figure, but it's nowhere near what's allocated from what I heard today (no politician has ever been jailed for corruption, there was one removed from office over corruption in school construction, he admitted the problem and repaid donors to compensate for what had been stolen, but the president reappointed him the next day so there was no real penalty even in this case). 

                      It's been a long first day, and I haven't really had time to digest all of this -- it was a bit surreal and it never really hit me that I was in a slum in Kenya -- so these are just a few observations from the first day. Hopefully, the picture and the economics, cultural, and social forces driving all of this will clear up a bit over the next nine days.

                        Posted by on Tuesday, June 19, 2012 at 04:23 AM in Development, Economics, Kenya | Permalink  Comments (53) 

                        Fed Watch: Two Days Until the Fog Lifts

                        Tim Duy:

                        Two Days Until the Fog Lifts, by Tim Duy: Some additional stories to consider as await the outcome of this week's Fed meeting. First, tonight's Jon Hilsenrath WSJ article detailing the Fed's concern about the credit divide:

                        The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom...

                        ...Shrunken access among credit have-nots is triggering more than personal plight. It has weakened the influence of the Fed—one of the best hopes for spurring stronger economic growth—and raised doubts within the central bank about whether it is doing much to reduce unemployment...

                        That underwriting conditions have tightened dramatically is not exactly a new story - as Hilsenrath writes, the Fed released a report urging Congress to take action to ease credit conditions in mortgage markets. What is interesting is the timing, coming just two days ahead of what is likely to be a somewhat contentious FOMC meeting. The underlying context of the story is that if credit market channels are clogged, additional action on the part of the Federal Reserve will have little impact. Consider this in terms of the risk/reward trade off that Fed official like to cite when discussing options for additional easing. They may be hesitant of taking the risk that all they get from additional easing is criticism from lawmakers - and no shortage of it during an election year - in return for very little benefit.

                        The article also highlights the Fed's fetish with low interest rates. They should forget about trying to keep interest rates low, and instead enact policies that support enough growth such that interest rates begin to rise. This is of course how policy is supposed to operate - long-term rates rise as market participants believe the Fed will need to raise short term rates in response to real inflationary pressures, not just the phantom ones in the minds of a subset of monetary policymakers.

                        With that in mind, Zero Hedge posts Goldman Sachs' FOMC preview Q&A. Goldman is expecting a new round of QE, largely on the expectation that the Fed will significantly mark down its economic forecast as well as feel a need to respond to the European crisis (in effect, doing the job the ECB has abdicated). This is a greater policy response than the more generally expected extension of Operation Twist, but also a completely reasonable expectation given the some of the Fedspeak we have heard. Goldman, however, suggests the Fed might go one step further:

                        If it is specified as a "stock" of purchases, we would expect a similar size as in past programs, i.e. $400bn-$600bn over 6-9 months. However, it is also possible that the program would be specified as a "flow" of purchases of perhaps $50bn-$75bn per month.

                        I believe the emphasis was added by Zero Hedge. Given that the Fed has repeatedly emphasized that it is the stock of holdings, not the flow, that is important, this would represent a major policy shift. The Fed would be finally utilizing the expectations channel, effectively promising to hold policy steady rather than promising a discrete end date.

                        While I would greatly welcome open-ended QE, it seems like a pretty big leap for a central bank that just a few weeks ago was expected to hold policy constant. Moreover, I am hard-pressed to say that economic or financial conditions have deteriorated such that the Fed would shift gears so quickly. This doesn't feel like 2008. I am not even sure it feels like last fall when the Fed embarked on Operation Twist. That said, the Fed might suspect, or know, that Europe is going down the tubes on the back of some let's just say some questionable economic policy making. Better to get ahead of that curve. Well ahead.

                        Bottom Line: More grist to chew on as the Fed's two-day meeting begins, with one take away that the Fed might opt to do less than expected, and another much more.

                          Posted by on Tuesday, June 19, 2012 at 04:05 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (18) 

                          Fed Watch: The Monday After

                          Tim Duy (I missed this one yesterday):

                          The Monday After, by Tim Duy: Today is the first day after the "crucial" Greek vote. Except that vote was probably not all that crucial. Nothing fundamental has changed in Europe over the weekend. At best, all that has been accomplished is pushing out the end-game once again.

                          The Financial Times reports that Greece is on the verge of forming a government:

                          Antonis Samaras, leader of Greece’s New Democracy, began talks to form a coalition government on Monday following his party’s failure to secure an outright majority in the country’s election.

                          If Europe thought this would be the end of the story on the last bailout, think again:

                          Mr Samaras told reporters after his meeting with Mr Tsipras that he would invite all pro-European parties to join a coalition government.

                          He also restated his determination to seek “alterations” to the bailout by renegotiating the terms with Greece’s creditors.

                          Bloomberg reports that German Chancellor Angela Merkel just says "nein" to such bluster:

                          German Chancellor Angela Merkel said Greece shouldn’t be granted leeway on terms for its bailout, rejecting signals from her foreign minister that creditors may relent on austerity measures...

                          ...“The important thing is that the new government sticks with the commitments that have been made,” Merkel told reporters at the G-20 meeting in the Mexican resort of Los Cabos. “There can be no loosening on the reform steps.”

                          Yes, another showdown is certain. Merkel will give up only the slightest sliver of ground, almost ensuring the Greek economy remains locked in a never ending cycle of austerity. And according to rumor this is exactly why Alexis Tsipras, the leader of Syriza, has no interest in joining with New Democracy in a coalition government, instead leaving the inevitable failure of this next bailout on the shoulders of his opponents.

                          And while the world learns about Greek politics, the real story is Spain. Clearly, market participants saw nothing good in the Greek results for the trajectory of Spain's problems. Yields on 10-year debt surged solidly above 7% today:


                          Of course, if European policymakers expected a pro-Euro Greek outcome to bring relief to Spain and Italy (now above 6%), they were sure to be disappointed. Hopes for a firewall around Greece are so 2011. The fire has already jumped that line, and it looks as if Europe has yet to send any firefighters to battle the blaze. Meanwhile, the only institution that can move quickly remains committed to standing on the sidelines. To be sure, ECB President Mario Draghi signalled that the ECB has room to move, but he did not signal the timing. For the sake of the Spanish people, it really needs to be sooner than later.

                          Bottom Line: This Monday feels like all the others. The latest Greek vote is behind us, but the the dysfunctional political and economic system that is Europe remains.

                            Posted by on Tuesday, June 19, 2012 at 04:02 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (0) 

                            The African Growth and Opportunity Act

                            Congress is unlikely to renew the trade agreement with African countries known as the African Growth and Opportunity Act:

                            Rule to Encourage Africa Trade Set to Expire, by Neanda Salvaterra, WSJ: A clause in a U.S. trade law designed to stimulate trade with Africa is set to expire Sept. 30 and, so far, there appears little prospect that it will be renewed by Congress.
                            At issue is a provision in the African Growth and Opportunity Act, which was passed with bipartisan support by Congress in 2000 and gives 40 African countries tariff-free access to the U.S. market. Some 90% of exports to the U.S. from Africa since then have been oil.
                            But a clause called the “third-country fabric rule” has been successful in encouraging the growth of African textile and apparel manufacturing, which is part of the development goal of AGOA, as the law is known. ... But the provision had a built-in expiration date of Sept. 30, 2012. And, so far, there appears to be little prospect Congress will renew it.
                            The reason: partisan bickering, says Witney Schneidman, a former deputy assistant secretary of state for African affairs under President Bill Clinton who recently authored a report on AGOA for the Brookings Institution.
                            Few bills have made it to a vote in Congress this year. Any bill, including an extension of the third-country rule, that comes up for a vote therefore runs the risk of having a range of legislation appended to it that otherwise is unlikely to reach the House floor. ...
                            Renewing the provision isn’t a pressing issue for U.S. manufacturers as the African third-party garment provision represents a small part of overall U.S. textile imports. But the rule has generated $800 million in exports and a lot of jobs in Africa where oil extraction generates few employment opportunities for medium and low skilled labor. ...
                            AGOA , which is set to expire in 2015, was crafted at a time when the U.S. focus was aid and not trade. According to Mr. Schneidman, this needs to change, if U.S. firms are to compete with countries like China which has engaged Africa with an estimated $ 73.4 billion in export trade. ...

                            Here's more from Brookings:

                            Summary In May 2000, President Bill Clinton, as a part of his leadership in enhancing ties between the U.S. and Africa, signed into law the African Growth and Opportunity Act (AGOA), a historic piece of legislation that provides preferential duty-free access to U.S. markets for nearly 6,400 product lines from sub-Saharan Africa. With the goal of both supporting business in the United States and critical political and economic reforms in African countries, AGOA has created an estimated 300,000 jobs on the continent and contributed to the region’s emergence as one of the world’s fastest growing markets, with total U.S. exports to sub-Saharan Africa tripling between 2001 and 2011. Today, AGOA stands as the cornerstone of the U.S.-African commercial relationship. AGOA is set to expire in 2015 and U.S. Secretary of State Hillary Clinton and the U.S. Trade Representative Ronald Kirk have called for a "seamless renewal" of the act. This commitment to extending AGOA has led to a new policy debate over the length of the extension, how to strengthen the act, and how the U.S. can increase its commercial presence on the continent given the expanding influence of China, India, Brazil and other large emerging economies. ...

                              Posted by on Tuesday, June 19, 2012 at 03:24 AM in Economics, Kenya | Permalink  Comments (0) 

                              Challenges for Women in the African Economy

                              Via Brookings, one of the many things I read/watched to get ready for the trip to Kenya:

                              In many African countries, women still cannot own land or resources, a significant barrier to their ability to start businesses and take advantage of the continent’s economic potential. Fellow Anne Kamau explores their plight.

                              Challenges for Women in the African Economy

                                Posted by on Tuesday, June 19, 2012 at 01:07 AM in Kenya | Permalink  Comments (0) 

                                Links for 06-19-2012

                                  Posted by on Tuesday, June 19, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (44) 

                                  Monday, June 18, 2012

                                  Paul Krugman: Greece as Victim

                                  Paul Krugman:

                                  Greece as Victim, by Paul Krugman, Commentary. NY Times: Ever since Greece hit the skids, we’ve heard a lot about what’s wrong with everything Greek. ... Yes, there are big failings in Greece’s economy, its politics and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart, and threatens to spread across Europe.
                                  No, the origins of this disaster lie farther north, in Brussels, Frankfurt and Berlin, where officials created a deeply — perhaps fatally — flawed monetary system, then compounded the problems of that system by substituting moralizing for analysis. And the solution to the crisis, if there is one, will have to come from the same places. ...
                                  So how did Greece get into so much trouble? Blame the euro. ... Greece joined the euro, and a terrible thing happened: people started believing that it was a safe place to invest. Foreign money poured into Greece... To be sure, the Greeks squandered much if not most of the money that came flooding in, but then so did everyone else who got caught up in the euro bubble.
                                  And then the bubble burst, at which point the fundamental flaws in the whole euro system became all too apparent.
                                  Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.
                                  Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of. ...
                                  So Greece, although not without sin, is mainly in trouble thanks to the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government. And these same officials have made the situation even worse by insisting, in the teeth of the evidence, that all the currency’s troubles were caused by irresponsible behavior on the part of those Southern Europeans, and that everything would work out if only people were willing to suffer some more. ...
                                  The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris.

                                    Posted by on Monday, June 18, 2012 at 04:23 AM in Economics | Permalink  Comments (170) 

                                    Africa Specializing in Capital Exodus?

                                    This is from Léonce Ndikumana:

                                    Africa Specializing in Capital Exodus?, by Léonce Ndikumana: Even as Africa faces severe shortages of skilled labor at home, it experiences large and increasing outflows of highly-skilled labor migration to industrialized economies in search of better job opportunities. The investments made in the training of these professionals are losses to African countries but translate into hefty gains for receiving countries.  Thus resource-starved African nations are subsidizing developed countries’ industries and social services. ...
                                    Parallel to this exodus of human capital is the illicit export of financial capital from African countries – or capital flight. This is not a new phenomenon, and it shows no signs of abating.
                                    Over the past four decades, sub-Saharan Africa has lost a staggering $700 billion due to capital flight. In addition to trade misinvoicing, smuggling, and embezzlement of revenues from natural resource exports, a substantial part of the capital flight was financed by external borrowing. We estimate that every year 40 to 60 cents of each borrowed dollar spins out of the revolving door as capital flight, often returning to the same banks that issued the loans. On net basis, Africa is transferring more money to the rest of the world than it is receiving in terms of borrowing and aid. Once again, Africa is net financier to the rest of the world rather than the other way around as commonly perceived. And unlike in the case of human capital exodus, financial capital flight generates absolutely no flows in the reverse direction; it is an unmitigated loss to the continent.
                                    Capital flight, and the burden of servicing the debts that financed it, are partly to blame for the conditions that create the other economic problems faced by the continent...  Illicit financial flows drain scarce public resources that could have been used to finance public services including education and health. It partly explains why there are not enough schools, clinics, and medical equipment; it also explains the poor working conditions for doctors, teachers, and other professionals that force them to seek greener pastures abroad.
                                    Stemming capital flight could substantially bridge the financing gaps faced by African countries. ...
                                    It is clear that Africa’s development pathways, characterized by exodus of human and financial capital, are not sustainable in the long run. Obviously African countries have the primary responsibility to devise and implement strategies to keep capital onshore. But the international community also has an equally important responsibility to root out the perverse incentives and opacity in the financial system that enable and perpetuate the financial hemorrhage faced by the continent. This would enhance the efficiency of donors’ support to Africa’s efforts to boost investments in education, stimulate private sector development, employment creation, and generally improve domestic living and working conditions that are necessary for optimal utilization of skilled human capital on the continent. ...

                                      Posted by on Monday, June 18, 2012 at 03:33 AM in Economics, Kenya | Permalink  Comments (18) 

                                      Kenya in Transition

                                      An interview with Kenya’s Vice President and Minister for Home Affairs Stephen Kalonzo Musyoka:

                                      Kenya in Transition: A Conversation with Vice President Stephen Kalonzo Musyoka: Summary Few countries have experienced transitions as dramatic as those occurring now in the Republic of Kenya. Just in the past year, Kenyans have adopted a new national constitution, deployed security forces to Somalia in pursuit of al-Shabaab militants, and discovered commercially-viable oil deposits. Amid these developments, Kenya is preparing for its first presidential elections since the 2008 election disputes.

                                      On May 22, the Africa Growth Initiative (AGI) at Brookings hosted Kenya’s Vice President and Minister for Home Affairs Stephen Kalonzo Musyoka for a discussion on these dramatic transitions and current national challenges and opportunities. Vice President Musyoka was appointed by President Mwai Kibaki in 2008, and previously served as foreign affairs minister from 1993–98 and 2003–04.

                                        Posted by on Monday, June 18, 2012 at 03:24 AM in Development, Economics, Kenya | Permalink  Comments (2) 

                                        "Kenya’s Forever War"

                                        Dayo Olopade does not believe Kenya's “Operation Linda Nchi” -- it's war against terrorism -- is worth the cost:

                                        Kenya’s Forever War, by Dayo Olopade, Commentary, NY Times: NAIROBI — A bomb exploded in downtown Nairobi on Monday [May 28] — the eighth such attack in as many months. It was a far more sophisticated operation than the makeshift grenades that have been tossed from moving cars and into small churches and bars in the recent past. This bomb was big enough to send at least 30 Kenyans to the hospital. ...
                                        Al Shabab, the Somalia-based terrorist group, has claimed responsibility for previous attacks in Kenya. But there are other culprits closer to home: Odinga, President Mwai Kibaki and the Kenyan military brass who last year unilaterally declared open-ended war against Al Shabab, with unacceptable side effects.
                                        Operation Linda Nchi” (“Protect the Nation”), which began in October, was sold to Kenya with the same “offense as defense” playbook that took the United States into war with Iraq. Ministers assured Kenyans that the invasion would be quick and easy, focused on the “hot pursuit” of kidnappers and pirates who had been terrorizing Kenya’s northern coast.
                                        Like the promises of a slam dunk in Iraq, none of those projections have been true. Eight months on, the fight against Al Shabab — which even Somalia’s president has called “unwelcome” — is proceeding with only middling success. ... Taming Somalia is like taming Afghanistan: no nation has done it, though plenty have bled their treasuries trying.
                                        Living in the Horn of Africa over the past year, I’ve been humbled by the complexities of regional politics. The Kenyan establishment had its reasons to invade Somalia: fighting for vital tourist dollars, punishing rogue pirates and petty kidnappers, protecting the $24 billion port under construction in the northern town of Lamu. Pressure from an America that has itself soured on military intervention is also said to play a role. But I still believe that none of these justifications is worth it. ...
                                        The mounting belief that this foreign war is causing domestic violence has become a growing chink in the unified front that Kenyan citizens first projected when Linda Nchi began. Kenya’s failure to confront this could prolong the violence in both places.

                                          Posted by on Monday, June 18, 2012 at 02:43 AM in Economics, Kenya, Terrorism | Permalink  Comments (3) 

                                          Links for 06-18-2012

                                            Posted by on Monday, June 18, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (44) 

                                            Sunday, June 17, 2012

                                            T is for Transfers

                                            Paul Krugman on "What A Real External Bank Bailout Looks Like":

                                            ...Something I’ve been looking at: Texas after the savings and loan crisis of the 1980s.
                                            The cleanup from that crisis cost taxpayers about $125 billion (pdf), back when that was real money. As best I can tell, around 60 percent of the losses were in Texas (pdf). So that’s around $75 billion in aid — not loans, outright transfer.
                                            Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.
                                            And in the US it wasn’t even treated as an interstate political issue. ...
                                            I think you can make a strong case that if Texas had been an independent country in 1986-87 it would have experienced a huge financial and fiscal crisis.

                                              Posted by on Sunday, June 17, 2012 at 03:24 PM in Economics, Financial System | Permalink  Comments (26) 

                                              Africa and the Great Recession

                                              "In previous global downturns, sub-Saharan Africa has usually been badly affected—but not this time around":

                                              Africa and the Great Recession: Changing Times, by Antoinette Sayeh, iMFdirect: The world economy has experienced much dislocation since the onset of the global financial crisis in 2008. ... But in sub-Saharan Africa, growth for the region as a whole has remained reasonably strong (around 5 percent)...
                                              Of course,... not all economies have fared equally well. The more advanced economies in the region (notably South Africa) have close links to export markets in the advanced economies, and have experienced a sharper slowdown, and weaker recovery, than did the bulk of the region’s low-income economies.  Countries affected by civil strife (such as Cote d’Ivoire, and now Mali) and by drought have also fared less well...
                                              So why has most of sub-Saharan Africa continued to record solid growth against the backdrop of such a weak global economy?  And can we expect this solid growth performance to continue in the next few years?
                                              First... As we show in the latest IMF Regional Economic Outlook for Sub-Saharan Africa ... the region has been growing consistently strongly for over a decade.  ... This solid growth record has been supported by ... significantly less civil conflict, the generally favorable commodity price developments benefiting Africa’s natural resource exporters; and the extensive debt relief provided to most highly-indebted poor countries. But I would ascribe key importance to sound policy choices by African governments – both in terms of pursuing appropriate macroeconomic policies and pressing ahead with important reform measures.
                                              Specifically, economic policies in the last decade have been directed firmly toward economic stability and market liberalization. Inflation has been tamed, foreign reserves have risen, and debt burdens have been reduced. Fast-growing export markets in Asia have been tapped. The result has been rising investment—domestic and foreign—the deepening of financial sectors, and stronger productivity growth.
                                              Second, sub-Saharan Africa has been partially insulated from the adverse cyclical effects of the Great Recession because of a number of key factors.  Commodity prices for African natural resources have remained relatively high to date, sustained by the continued strong growth of major emerging market economies, most notably China.  African banking systems have not experienced the severe financial stresses recorded in the advance economies... And African policymakers were able to ease budgetary policies to support economic activity during this crisis, instead of being forced to cut outlays because of severe borrowing constraints as occurred in past downturns.
                                              Looking ahead In 2011, output growth in sub-Saharan Africa averaged 5 percent. In 2012, we project that it could be a touch higher...
                                              Not that everything is rosy. Unacceptable levels of poverty and poor social conditions still plague the region. Employment growth lags behind most emerging markets, with much of the growth still in agriculture and traditional services. Progress toward the Millennium Development Goals is too slow. And of course, with European finances still uncertain and geopolitical uncertainty troubling oil markets, the world economy could still take another turn for the worse. A resumed global downturn would hit African exports, investment, tourism, remittances, and aid flows to varying degree – slowing the pace of regional growth for a period but not derailing it over the medium term. ...
                                              Longer-term development Lastly, but crucially... How does sub-Saharan Africa keep up its good growth performance? Mainly, I think, by ... maintaining prudent macroeconomic policies and improving the business climate further. It also requires broadening the revenue base and modernizing public financial management so that essential spending—including on infrastructure and public services—can be financed.
                                              It is also vital that we keep a focus on the young and on inclusive growth. Better education, robust health, and realistic job opportunities are, in the long run, truly the only secure foundations to sustained prosperity.

                                                Posted by on Sunday, June 17, 2012 at 02:43 AM in Economics, Kenya | Permalink  Comments (23) 

                                                Kenya: Oil and Isolation

                                                Will then discovery of oil in the Turkana region of Kenya lead to civil conflict that rips the country apart?:

                                                Oil and Isolation, by Juliet Torome, Commentary, Project Syndicate: In Kenya, there is a running gag that sums up how far away the Turkana people live from the rest of us. When a Turkana man leaves for the capital, Nairobi, the joke goes, he tells his family, “I’m going to Kenya.” ...
                                                The Turkana people are, as the joke suggests, as far away from Nairobi as one can be without being foreigners. For this reason, we know very little about them. In schools, we learned about them only within the context of the Leakey family’s decades-long work excavating the Lake Turkana basin in search of fossils of humans’ ancestors. This could be one reason why Kenyans have historically looked at the Turkana people as archaic beings, millennia away from “civilization” and with different needs from most of the country.
                                                The lack of adequate infrastructure in the Turkana region is evidence of this. Unlike the Maasai, the Turkana inhabit a region that, until now, was of little or no value to the country. There are no wild animals to attract tourists, and, although the Turkana, like the Maasai, have preserved their indigenous culture, they are not renowned around the world, perhaps because of their distance from Nairobi. ...
                                                The discovery of oil presents Kenya with a rare opportunity to end the Turkana community’s marginalization. Discussion of how the oil exploration and extraction will proceed needs to start now, and the health of the environment surrounding the Turkana people must be paramount. ...
                                                Some of the precautions... to safeguard ... welfare include establishing a regulatory body that fosters transparency in contract negotiations; balancing oil production with conservation of the area’s unique biodiversity; enforcing high standards of corporate responsibility; and regulating land sales to prevent conflicts. Finally, the government should ensure that Turkana people are trained to understand and participate in the new sector.
                                                If Kenya approaches oil exploration and extraction ... and fails to implement these common-sense recommendations, a few years from now Kenyans might be sorry that oil was ever found. Indeed, Kenya could end up with a conflict similar to the one in Nigeria’s Niger Delta, where local people took up arms to fight the oil industry’s degradation of their environment.
                                                Unfortunately, the foundation for such a conflict has already, sadly, been laid. Many people in the Lake Turkana region are already armed with AK-47s and other weapons originally intended for protection from cattle rustlers. If Kenya’s government fails to protect the Turkana from the oil companies as well, its people might well start shooting.

                                                  Posted by on Sunday, June 17, 2012 at 01:17 AM in Economics, Kenya, Oil | Permalink  Comments (10) 

                                                  Links for 06-17-2012

                                                    Posted by on Sunday, June 17, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (38) 

                                                    Saturday, June 16, 2012

                                                    Broken Trust

                                                    Tyler Cowen:

                                                    Broken Trust Takes Time to Mend, by Tyler Cowen, Commentary, NY Times: president Obama caused a stir recently when he said that “the private sector is doing fine” and pinned many of the nation’s economic troubles on a decline in public-sector employment. He cited some interesting numbers, but he didn’t draw the right lesson — namely, that America is witnessing a collapse of trust in politics, including the shaping of its broad economic policy. 
                                                    Since Mr. Obama took office, 780,000 private sector jobs have been created, while the number of public sector jobs has fallen by about 600,000, mostly at the state and local level. A quick look might suggest that we need only to bolster the number of public sector jobs to have a healthier economy, but there is a deeper way to think about the problem.
                                                    State and local governments are controlled by politicians and, indirectly, by voters. And for better or worse, those voters have lost faith in the social returns of these jobs and our ability to afford them. The voters have responded by looking to cut expenses, and they’ve chosen state and local government employment as a target. ...

                                                    No time to comment -- will leave that to you.

                                                      Posted by on Saturday, June 16, 2012 at 01:18 PM in Economics, Politics | Permalink  Comments (93) 

                                                      Weakness in Recent US Data

                                                      Calculated Risk says all eyes are on Europe, but "US data was weak again":

                                                      US data was weak again. Retail sales and industrial production declined, consumer sentiment was down, and initial weekly unemployment claims increased. And the NY Fed manufacturing survey showed slow expansion in June. However inflation appears to be falling and this increases the possibility of further Fed policy accommodation at the FOMC meeting next week.

                                                      Wouldn't it have been nice if monetary and fiscal policy authorities had insured against problems back when it could have done some good (the "wait and see" approach puts policymakers far behind events given the lags in the effects of policy changes)? I can dream, can't I?

                                                        Posted by on Saturday, June 16, 2012 at 09:14 AM in Economics | Permalink  Comments (5) 

                                                        Trouble Ahead, Trouble Behind

                                                        Nouriel Roubini sees trouble ahead:

                                                        A Global Perfect Storm, by Nouriel Roubini, Commentary, Project Syndicate: Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere. Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter.
                                                        For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery. The eurozone banking system is becoming balkanized, as cross-border and interbank credit lines are cut off, and capital flight could turn into a full run on periphery banks if, as is likely, Greece stages a disorderly euro exit in the next few months.
                                                        Moreover, fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. ... As a result, disorderly breakup of the eurozone remains possible.
                                                        Farther to the west, US economic performance is weakening...
                                                        In the east, China, its growth model unsustainable, could be underwater by 2013...
                                                        Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013. ...
                                                        These risks are already exacerbating the economic slowdown...
                                                        Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats). Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.
                                                        Using exchange rates to boost net exports is a zero-sum game...
                                                        Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns’ inability to absorb additional losses from their banking systems. ...
                                                        Unfortunately, Germany resists ... key policy measures... As a result, the probability of a eurozone disaster is rising.
                                                        And, while the cloud over the eurozone may be the largest to burst, it is not the only one threatening the global economy. Batten down the hatches.


                                                          Posted by on Saturday, June 16, 2012 at 12:24 AM in Economics | Permalink  Comments (114) 

                                                          Links for 06-16-2012

                                                            Posted by on Saturday, June 16, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (43) 

                                                            Friday, June 15, 2012

                                                            Fed Watch: ECB Ready to Play?

                                                            Tim Duy:

                                                            ECB Ready to Play?, by Tim Duy: Draghi blinks. After dropping the ball and holding rates steady at the last meeting, ECB President Mario Draghi is signaling he is ready to get back into the game. Via Reuters:

                                                            The euro zone economy faces serious risks and no inflation threat, European Central Bank President Mario Draghi said on Friday in comments that heightened expectations the ECB could cut interest rates or take other policy action soon.

                                                            Draghi also said the ECB stood ready to provide further liquidity to solvent banks, stressing that its provision of ultra-cheap 3-year funds, or LTROs, late in 2011 and early this year had averted a major credit crunch...

                                                            ...There are serious downside risks here," Draghi told the annual ECB Watchers conference in Frankfurt. "This risk has to do mostly with the heightened uncertainty."

                                                            I am not so sure about this "heightened uncertainty" line. It seems pretty certain that Spain is in trouble if rates hold at these levels or head higher, and this is the immediate problem. Draghi might have in mind bringing down rates with another stab at the temporary solution the LTROs provided last year. Helpful, but still only temporary. It would be more helpful if he switched gears to outright quantitative easing via government bond purchases (oddly, though, the expectation is that the Federal Reserve will do more than Europe in response to a European problem).

                                                            What would be most helpful is a clear signal that the ECB will not let the Eurozone collapse because default fears are driving unpleasant dynamics. Consider this helpful chart from Frances Woolley:


                                                            Woolley comments:

                                                            The convergence of bond yields after the Euro was introduced reveals that the pre-Euro yield differences were almost entirely based on inflation and exchange rate risk. No one ever seriously considered the possibility that an EU country might not be able to repay its debt. That's what they were thinking...

                                                            Prior to the introduction of the Euro, the presence of independent central banks prepared to serve as a lender of last resort for the fiscal authorities meant that there was no serious default risk. There would, of course, be inflation (soft-default) and exchange rate risk, but no hard-default risk. You can't really default when you can print the currency in which your debt is denominated. After Lehman, though, the possibility of default appears, and the ECB does nothing to dispel such fears. Moreover, the Greek debt restructurings dispelled any remaining doubts about European sovereign debt - the lack of a central bank backstops means serious default risk.

                                                            So now we can't rule out a possibility of Spanish default, which drives interest rates higher, which in turn increases the probability of default. This of course then feeds into the dynamics for Italy, and then maybe France. The only entity that can break the cycle is the ECB, but they have been so far unwilling to do so, putting the pressure on fiscal authorities to break the cycle. Unfortunately, the job is simply too big and complicated for the fiscal authorities to complete in a timely fashion, especially when running Merkel's race against the markets.

                                                            What we really need is a European Central Bank that can manage exchange rate and inflation risk while also addressing default risk. Without such a fully functional central bank, Europe will at best limp along under constant economic distress. Ultimately, Draghi will need to create such a central bank before the fiscal plumbing is in place if he wants to hold the Eurozone together. Which is why he will always blink first.

                                                            Or at least I hope he will.

                                                              Posted by on Friday, June 15, 2012 at 02:43 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (8) 

                                                              Fed Watch: Communications Failure

                                                              Another one from Tim Duy:

                                                              Communications Failure, by Tim Duy: Reading Cardiff Garcia's preview of next week's Fed meeting, I was struck by this chart from Nomura:


                                                              The extensive discussion of options with arguments for and against reminded me of the fog that hangs over this next meeting.  We really have no idea what the Fed is going to do or why they are going to do it.  Reasonable analysis ranges from nothing to massive quantitative easing. 
                                                              To be sure, I am certain of some things.  For example, that swap lines will be expanded in the event of a severe market disruption. I am stunned that this was actually considered new information yesterday - it seems that actions along these lines is a no-brainer.  But absent the all-bets-are-off-financial-collapse story, I am a bit shaken by the uncertainty going into this meeting.
                                                              This strikes me as a major communications failure on the part of the Federal Reserve.  The problem, I suspect, is that they don't know exactly what they would do if more easing is called for, which is why we  see talk of all possible options - doing nothing, extending Operation Twist, communication changes, and additional assets purchases.  They can't tell us what they don't know.
                                                              I worry that the Federal Reserve has spent much more intellectual effort on procedures to tighten policy, and not enough effort on additional easing policy.  Indeed, easing has really been on an ad-hoc basis.  Moreover, we don't really know the triggers for additional easing because officials repeatedly refer to the risk/reward trade off, suggesting that they think the rewards are relatively small at this point, which suggests that the bar must be very high.  But many policymakers seem to have a hair trigger for additional easing, so which is it?  It the bar high or low?  Judging by Federal Reserve Chairman Ben Bernanke's past behavior, I tend to think the bar is pretty high.  Perhaps this is just my pessimism talking.
                                                              It would be very helpful if at the next FOMC meeting policymakers could agree to a specific path for additional easing, if needed, and eliminate the ad-hoc approach.  In other words, put as much effort toward explaining how they would move forward as put toward how they would move back.

                                                                Posted by on Friday, June 15, 2012 at 02:34 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (11) 

                                                                Have Blog, Will Travel

                                                                Just a quick note. I have a somewhat brutal travel schedule the next few days, and when all is said and done, I ought to be in Nairobi, Kenya:

                                                                IRP’s International Bloggers Take on Reproductive Health in Kenya: Twelve international bloggers have been selected to report on pressing issues of reproductive health and population in Kenya this month.
                                                                In an exciting new global initiative, the International Reporting Project (IRP) is taking a group of 12 influential bloggers from around the world to Kenya on June 17-26 for an in-depth examination of reproductive health and population issues in that East African country.
                                                                Watch the IRP website for regular updates from the bloggers, and follow them on Twitter as they recount their impressions and observations of Kenya. This is the first time in its 15-year history that the IRP is taking a group of new media journalists from different countries around the world to focus on a specific global issue. The 12 bloggers come from eight countries and represent a unique diverse set of specialties – including religion, ethics, culture, economics and gender issues in the developed world. In an intensive schedule that will take them to three different regions of Kenya, the bloggers will talk to Kenyan parents and children, health officials, rural and urban citizens and experts on gender, religion and ethics. Kenya’s population is expected to double by 2040 and the country faces major health challenges, urban migration and environmental pressures caused by this rapidly growing population. [list of participants]

                                                                They know that I am not an expert on women's reproductive health issues, though I will talk about related economic issues, but my main focus will be on economic problems in Kenya (I already have around 10 background posts set to go). And no, you aren't the first person to make an Obama joke.

                                                                After that, I'm going to this year's Nobel meetings in Lindau, Germany (the meetings bring Nobel laureates together with 500-600 graduate students from around the world). I'll stop over in Zurich for three days first, but since I was going through Zurich anyway on the way back from Kenya, I figured why not go to Lindau too -- it isn't very far away. I went last year when the topic was economics, but this year the Nobel winners are from chemistry and physics. Since it isn't economics I was surprised to be invited, and had to be accredited as press to get in (ha, I was), but there are issues related to economics, e.g. global warming that I want to cover. But mostly I'm looking forward to hearing talks on something other than economics. It will be a nice break, and for the most part I have no idea what I'll be hearing (or writing about).

                                                                Then, home for 4 days and off to Boston for an NBER meeting, and some other stuff. Finally home in late July.

                                                                I am going to do my best to keep up with the blog. I have at least two posts already loaded for each day of the time I'll be in Kenya, we have been promised internet access daily and some blogging time (though nothing like usual -- withdrawals!), and I have an unlocked iPhone that I hope to load with a sim chip and tons of prepaid data (from Safaricom). We'll see how that goes, but if it works I can (fingers crossed) tether to my computer and have fairly good internet access. But I have no idea what's ahead, and I hope you will understand if I am not able to keep up with links in particular on the usual, regular schedule. I'll try, but realistically it will be hard.

                                                                I never would have guessed that an economics blog would bring so much travel.

                                                                  Posted by on Friday, June 15, 2012 at 02:43 AM in Economics, Travel, Weblogs | Permalink  Comments (16) 

                                                                  Paul Krugman: We Don’t Need No Education

                                                                  When Republicans talk about reducing the size of government, what does that really mean?:

                                                                  We Don’t Need No Education, by Paul Krugman, Commentary, NY Times: Hope springs eternal. For a few hours I was ready to applaud Mitt Romney for speaking honestly about what his calls for smaller government actually mean.
                                                                  Never mind. Soon the candidate was being his normal self, denying having said what he said... In the remarks Mr. Romney ... derided President Obama: “He says we need more firemen, more policemen, more teachers.” Then he declared, “It’s time for us to cut back on government and help the American people.” ...
                                                                  For once, he actually admitted what he and his allies mean when they talk about shrinking government. Conservatives love to pretend that there are vast armies of government bureaucrats doing who knows what; in reality, a majority of government workers are employed providing either education (teachers) or public protection (police officers and firefighters). ...
                                                                  But the more relevant question for the moment is whether the public job cuts Mr. Romney applauds are good or bad for the economy. And we now have a lot of evidence ... that austerity in the face of a depressed economy is a terrible mistake to be avoided if possible.
                                                                  And the point is that in America it is possible ... to reverse the job cuts that are killing the recovery: have the feds, who can borrow at historically low rates, provide aid that helps state and local governments weather the hard times. That, in essence, is what the president was proposing and Mr. Romney was deriding. ...
                                                                  Actually, it’s kind of ironic. While Republicans love to engage in Europe-bashing, they’re actually the ones who want us to emulate European-style austerity and experience a European-style depression.
                                                                  And that’s not just an inference. Last week R. Glenn Hubbard..., a top Romney adviser, published an article in a German newspaper urging the Germans to ... continue pushing their hard-line policies. In so doing, Mr. Hubbard was ... throwing his support behind a policy that is collapsing as you read this.
                                                                  In fact, almost everyone following the situation now realizes that Germany’s austerity obsession has brought Europe to the edge of catastrophe — almost everyone, that is, except the Germans themselves and, it turns out, the Romney economic team.
                                                                  Needless to say, this bodes ill if Mr. Romney wins in November. For all indications are that the his idea of smart policy is to double down on the very spending cuts that have hobbled recovery here and sent Europe into an economic and political tailspin.

                                                                    Posted by on Friday, June 15, 2012 at 12:33 AM in Economics, Fiscal Policy | Permalink  Comments (102) 

                                                                    Fed Watch: Greece Now Just a Footnote

                                                                    Tim Duy:

                                                                    Greece Now Just a Footnote, by Tim Duy: This weekend's Greek elections are the focus of intense speculation with market participants - and, so we are told, global central bankers - preparing for the worst. I am not quite sure that Greece should be such a focus at this point. I think Kiron Sakar over at The Big Picture is on the right track on this one:

                                                                    The reality is that Mr Tsipras wont be able to negotiate a better deal (he is delusional) and if he is in power and maintains his current position, Greece will be out of the EZ pretty soon thereafter. If New Democracy wins and can form a coalition, there will be some give from the rest of the EZ, but the Greeks will never deliver, which suggests to me that they will be forced to exit, but a little bit later.

                                                                    That sounds about right; Greece is pretty much a lost cause at this point, regardless of this weekend's outcome. And worrying about contagion from Greece is just a little too late. The story is now Spain, whose ten-year yields brushed up against 7% today. And Italy, who sold three-year debt at 5.3% and ten-year yields above 6%. And increasingly you hear France as well. This has gone way beyond Greece at this point.

                                                                    Meanwhile, the ECB remains on the sidelines, reportedly waiting for European fiscal policymakers to make the next step. According to Nouriel Roubini from his frequent emails:

                                                                    If EU leaders could formulate, and demonstrate commitment toward, a clear plan to achieve a full fiscal, banking and political union that would also involve debt mutualization, the ECB would be willing to take appropriate policy actions to promote this integration and provide a bridge toward a broader union. A successful strategy would entail less front-loaded fiscal austerity and structural reforms; a growth compact that is substantial and not just cosmetic; a full banking union, starting with EZ-wide deposit insurance; and fiscal union and debt mutualization in the EZ.

                                                                    Well, that's pretty much asking for heaven and earth, isn't it? I don't see how the Europeans are going to pull that together before their summer vacation. And I can't see that France lowering the retirement age to 60 is going to help - it won't exactly help ease German fears that a fiscal union will be little more than a mechanism for Germany to fund the rest of Europe. And regardless of the French move, Germany remains something of a stick in the mud. From German Chancellor Angela Merkel, via the FT:

                                                                    In a restatement of the limits to German action in tackling the debt crisis, she reeled off a list of unacceptable demands from other countries – including the US and UK – for “big bang” solutions to solve the crisis.

                                                                    They included jointly guaranteed eurozone bonds, which she described as “counter-productive” and illegal under the German constitution, as well as a publicly financed European bank deposit insurance scheme, and France’s new call for a “financial stability package”.

                                                                    Merkel is right about one thing:

                                                                    “Europe has set out to complete economic and monetary union,” she said. “Here we are certainly in a race with the markets.”

                                                                    I hope she does have a workable scheme up her sleeve, because as it looks right now, she is in a race she can't win.

                                                                      Posted by on Friday, June 15, 2012 at 12:24 AM in Economics, Fed Watch, Financial System | Permalink  Comments (51) 

                                                                      Fed Watch: Measures of Financial Stress

                                                                      One more from Tim Duy:

                                                                      Measures of Financial Stress, by Tim Duy: Since we are all running downhill and gaining speed with expectations that the Federal Reserve will do "something" on a grand scale next week, I thought I would continue on with my earlier theme of looking at the other side of the story. With that in mind, some measures of financial stress:


                                                                      This snapshot suggests that financial stress, at least in the US, is no worse, and on average better, than during last year's Eurocrisis flareup. Nor, as I suggested in my last post, do I think we have enough data to make significant downward revisions to the economic forecast. Yet increasingly market participants are thinking the Fed will move forward with a sizable new QE program. Which means, compared to last year's Operation Twist, expecting the Fed to do more on the basis of less.
                                                                      Not that they won't; the Eurocrisis is putting plenty of downside risk in the forecast. But it is something to think about.

                                                                        Posted by on Friday, June 15, 2012 at 12:15 AM in Economics, Fed Watch, Financial System | Permalink  Comments (6) 

                                                                        Links for 06-15-2012

                                                                          Posted by on Friday, June 15, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (24) 

                                                                          Thursday, June 14, 2012

                                                                          "Inflation Targeting is Dead"

                                                                          Jeff Frankel takes up the question of inflation targeting versus nominal GDP targeting, and concludes that nominal GDP targeting has many advantages:

                                                                          Nominal GDP Targeting Could Take the Place of Inflation Targeting, by Jeff Frankel: In my preceding blogpost, I argued that the developments of the last five years have sharply pointed up the limitations of Inflation Targeting (IT)...   But if IT is dead, what is to take its place as an intermediate target that central banks can use to anchor expectations?
                                                                          The leading candidate to take the position of preferred nominal anchor is probably Nominal GDP Targeting.  It has gained popularity rather suddenly, over the last year.  But the idea is not new.  It had been a candidate to succeed money targeting in the 1980s, because it did not share the latter’s vulnerability to shifts in money demand.  Under certain conditions, it dominates not only a money target (due to velocity shocks) but also an exchange rate target  (if exchange rate shocks are large) and a price level target (if supply shocks are large).   First proposed by James Meade (1978), it attracted the interest in the 1980s of such eminent economists as Jim Tobin (1983), Charlie Bean (1983), Bob Gordon (1985), Ken West (1986), Martin Feldstein & Jim Stock (1994), Bob Hall & Greg Mankiw (1994), Ben McCallum (1987, 1999), and others.
                                                                          Nominal GDP targeting was not adopted by any country in the 1980s.  Amazingly, the founders of the European Central Bank in the 1990s never even considered it on their list of possible anchors for euro monetary policy.  ...
                                                                          But now nominal GDP targeting is back, thanks to enthusiastic blogging by Scott Sumner (at Money Illusion), Lars Christensen (at Market Monetarist), David Beckworth (at Macromarket Musings), Marcus Nunes (at Historinhas) and others.  Indeed, the Economist has held up the successful revival of this idea as an example of the benefits to society of the blogosphere.  Economists at Goldman Sachs have also come out in favor. 
                                                                          Fans of nominal GDP targeting point out that it would not, like Inflation Targeting, have the problem of excessive tightening in response to adverse supply shocks. ...
                                                                          In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target).   But why has it suddenly gained popularity at this point in history...?  Nominal GDP targeting might also have another advantage in the current unfortunate economic situation that afflicts much of the world:  Its proponents see it as a way of achieving a monetary expansion that is much-needed at the current juncture.
                                                                          Monetary easing in advanced countries since 2008, though strong, has not been strong enough to bring unemployment down rapidly nor to restore output to potential.  It is hard to get the real interest rate down when the nominal interest rate is already close to zero. This has led some, such as Olivier Blanchard and Paul Krugman, to recommend that central banks announce a higher inflation target: 4 or 5 per cent.  ...  But most economists, and an even higher percentage of central bankers, are loath to give up the anchoring of expected inflation at 2 per cent which they fought so long and hard to achieve in the 1980s and 1990s.  Of course one could declare that the shift from a 2 % target to 4 % would be temporary.  But it is hard to deny that this would damage the long-run credibility of the sacrosanct 2% number.   An attraction of nominal GDP targeting is that one could set a target for nominal GDP that constituted 4 or 5% increase over the coming year - which for a country teetering on the fence between recovery and recession would in effect supply as much monetary ease as a 4% inflation target - and yet one would not be giving up the hard-won emphasis on 2% inflation as the long-run anchor.
                                                                          Thus nominal GDP targeting could help address our current problems as well as a durable monetary regime for the future.

                                                                          It's hard to figure out how to fix the world if you don't have a reliable model that can explain what went wrong. The optimal money rule in a model depends upon the the way in which changes in monetary policy are transmitted to the real economy. Is it because of price rigidities? Wage rigidities? Information problems? Credit frictions and rationing? The best response to a negative shock to the economy varies depending upon what type of model the investigator is using.

                                                                          Thus, for the moment we need robust rules. Inflation targeting works well in models with Calvo type price-rigidities, and a Taylor type rule often emerges from models in this general class, but is this the most robust rule in the face of model uncertainty? We don't know the true model of the macroeconomy, that ought to be clear at this point. Does inflation targeting work well when the underlying problem is a breakdown in financial intermediation or other big problems in the financial sector? I'm not at all convinced that it does - some of the best remedies in this case involve abandoning a strict adherence to an inflation target in the short-run.

                                                                          So, in the best of all worlds I'd prefer to have a model of the economy that works, find the optimal policy rule for that model, and then execute it. In the world we live in, I want robust rules -- rules that work well in a variety of models and in the face of a variety of different types of shocks (or at least recognize that the rule has to change when the source of the problem switches from, say, price rigidities to a breakdown in financial intermediation). One message that comes out of the description of NGDP targeting above is that this approach does appear to be more robust than inflation targeting. It's not always better, in some models a standard Taylor type rule is the best that can be done. But it's becoming harder and harder to believe that the Great Recession can be adequately described by models of this type, and hence hard to believe that we are well served by policy rules that assume price rigidities are the main source of economic fluctuations.

                                                                            Posted by on Thursday, June 14, 2012 at 12:26 PM in Economics, Macroeconomics, Methodology, Monetary Policy | Permalink  Comments (80) 

                                                                            Fed Watch: Devil's Advocate

                                                                            Tim Duy:

                                                                            Devil's Advocate, by Tim Duy: Expectations are building for Federal Reserve action next week. Bloomberg hits on a key point:

                                                                            Chairman Ben S. Bernanke told lawmakers last week the “central question” confronting the Federal Reserve at its next meeting is whether growth is fast enough to make “material progress” reducing unemployment.

                                                                            The answer may well be no...

                                                                            ...“They’re not closing that employment gap as fast as they’d like, so I suspect it adds up to more action to get things moving again,” said Michael Feroli, chief U.S. economist at New York-based JPMorgan Chase & Co. and a former researcher for the Federal Reserve Board in Washington. “Bernanke has a clear economic mandate, and we’re still far from achieving it.”

                                                                            I think there are two issues at play, the forecast itself and the risk to that forecast. On the first point, I am not convinced that incoming data have proved sufficient to measurably change the forecast. On the key jobs issue, I keep getting pulled back to this from Bernanke's testimony:

                                                                            This apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter. But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession. If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed, and, consequently, that more-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions.

                                                                            I sense a great deal of uncertainty in the paragraph, suggesting to me that Bernanke would like to see more data before committing to a new policy path. Of course, one could point to the weak tenor of the most recent string of initial claims reports as additional evidence of a flagging job market:


                                                                            That said, I am still hard-pressed to see that this is sufficient to believe the steady downtrend in claims has been disrupted:


                                                                            There is also the general sense that softer inflation numbers give the Fed room to act, particularly with headline CPI inflation now down below 2% year-over-year:


                                                                            On this point I would caution that the downward move in headline has yet to be confirmed by core. This should be a symmetric game. Just as core inflation never rose fast enough to justify concerns about headline inflation, sticky core inflation in the face of declining headline inflation would signal to the Federal Reserve that they should not yet reduce their inflation forecasts.

                                                                            I would also add that the anecdotal evidence is less dire, to say the least. The most recent Beige book:

                                                                            Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May. ...

                                                                            Manufacturing continued to expand in most Districts. Consumer spending was unchanged or up modestly. New vehicle sales remained strong and inventories of some popular models were tight. Sales of used automobiles held steady. Travel and tourism expanded, boosted by both the business and leisure segments. Demand for nonfinancial services was generally stable to slightly higher since the last report, and several Districts noted strong growth in information technology services. Conditions in residential and commercial real estate improved. Construction picked up in many areas of the country. Lenders in most Districts noted an improvement in loan demand and credit conditions. Agricultural conditions generally improved, and spring planting was well ahead of its normal pace in most reporting Districts. Energy production and exploration continued to expand, except for coal producers who noted a slight slowing in activity.

                                                                            Wage pressures overall were modest. Hiring was steady or increased slightly, and contacts in a number of Districts reported difficulties in finding qualified workers, particularly those with specialized skills. Price inflation remained modest across Districts, and overall cost pressures eased as the price of energy inputs declined. Economic outlooks remain positive, but contacts were slightly more guarded in their optimism.

                                                                            Confirming that relatively upbeat view is this from Bloomberg:

                                                                            Rising truck shipments show the U.S. economic expansion is intact, even amid concerns that a slowdown in retail sales and Europe’s sovereign-debt crisis could stall growth.

                                                                            Two measures of trucking activity signal the industry remains steady and has even “firmed up” since mid-May, according to Ben Hartford, an analyst in Milwaukee with Robert W. Baird & Co. The data complement anecdotal information from carriers that freight demand ended May on a strong note after more weakness than anticipated earlier in the month, he said.

                                                                            “Trucking trends are reflective of an economic environment that is stable, not deteriorating,” Hartford said.

                                                                            To me, the upshot is that the data flow over the past two years has been sloppy, possibly a reflection seasonal adjustment issues, leaving the general rule of avoiding excessive optimism and excessive pessimism as the best bet. That rule argues for a relatively limited changes to the Fed's forecast.

                                                                            If the Fed follows the above line of thinking, they will hold steady next week. In other words, there is a nontrivial risk that financial market participants are getting ahead of the Fed. That said, even if the forecast does not change materially, it seems pretty clear that the risks to the downside have increased. Indeed, the ECB is working overtime to ensure the risks remain to the downside. This argues for additional action, especially with a block of Fed officials - including Vice-Chair Janet Yellen, San Francisco Federal Reserve President John Williams, and Chicago Federal Reserve President Charles Evans - who likely already desired more easing under the most recent forecast.

                                                                            Bottom Line: I think you can tell a story that the most recent data is not sufficient to move Fed forecasts, in which case it remains possible that the Fed does not implement any changes next week. I have to admit to being a little nervous that we get a Fed "leak" over the next few days in an effort to reset expectations ahead of the meeting. Still, given the increased downside risks to the forecast, it is hard for me to make this my baseline scenario, especially given the very dovish Yellen/Williams/Evan contingent, which is why I expect some action next week. But much still rests on Bernanke, who has surprised by positioning himself to the hawkish side of the center. After all, if he believed the Yellen/Williams/Evans stories, he would have eased already. He hasn't, suggesting that he has a pretty high bar to additional easing, and we just might not have crossed that bar.

                                                                              Posted by on Thursday, June 14, 2012 at 12:24 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (10) 

                                                                              A Back Door to the Public Option?

                                                                              Robert Reich says there's still hope even if the Supreme Court strikes down the individual mandate in the Affordable Care Act:

                                                                              A Back Door to the Public Option, by Robert Reich: Any day now the Supreme Court will issue its opinion on the constitutionality of the Accountable Care Act, which even the White House now calls Obamacare.
                                                                              Most high-court observers think it will strike down the individual mandate in the Act that requires almost everyone to buy health insurance,... but will leave the rest of the new healthcare law intact.
                                                                              But the individual mandate is so essential to spreading the ... cost of health care over the whole population, including younger and healthier people, that some analysts believe a Court decision that nixes the mandate will effectively spell the end of the Act anyway.
                                                                              Yet it could have exactly the opposite effect. If the Court strikes down the individual mandate, health insurance company lobbyists and executives will swarm Capitol Hill seeking to have the Act amended to remove the requirement that they insure people with pre-existing medical conditions. They’ll argue that without the mandate they can’t afford to cover pre-existing conditions.
                                                                              But the requirement to cover pre-existing conditions has proven to be so popular with the public that Congress will be reluctant to scrap it. This opens the way to a political bargain. Insurers might be let off the hook, for example, only if they support allowing every American, including those with pre-existing conditions, to choose ... something very much like Medicare. In effect, what was known during the debate over the bill as the “public option.” ...
                                                                              The fact is, there’s enough the public likes about Obamacare that if the Court strikes down the individual mandate that won’t be the end. It will just be the end of the first round.

                                                                              I'd like to think he's right, but hard for me to see this happening. [Here's an old post explaining why an individual mandate is needed.]

                                                                                Posted by on Thursday, June 14, 2012 at 12:42 AM in Economics, Health Care, Market Failure | Permalink  Comments (43) 

                                                                                Links for 06-14-2012

                                                                                  Posted by on Thursday, June 14, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (90) 

                                                                                  Wednesday, June 13, 2012

                                                                                  Easing by the Fed Seems Likely, But What Form Will it Take?

                                                                                  Just a quick note to reinforce what Tim Duy said here. Many policymakers at the Fed would like to provide more help for the economy, but fear of inflation among other members of the monetary policy committee -- enough to matter -- makes it unlikely that the Fed will expand the size of its balance sheet (as another round of QE would do). The way around this is to enact or suggest policies such as "forward guidance," "Operation Twist," and "sterilization" that attempt to ease policy without changing the size of the balance sheet. Forward guidance, for example, tries to adjust inflationary expectations -- there is an implicit promise of future action to maintain low rates, but it does not require any action when it is announced (and Fed members are denying it was an explicit promise in any case), while Operation twist and sterilization both exchange short-term for long-term assets (sell short-term, purchase long-term) in an attempt to force long-term interest rates even lower than they already are (and hopefully stimulate investment and the consumption of durables).

                                                                                  If the Fed is inclined to ease more, its instinct will be to look at these types of policies first, policies that try to help the economy without increasing the risk of inflation. But as we've seen recently, these types of policies are also limited in their effectiveness precisely because of their cautious nature.

                                                                                  Of course, if Europe falls apart, all bets are off -- in that case the Fed may get more aggressive. But for now I expect the Fed to continue to try to find clever ways of doing something without really doing anything at all.

                                                                                    Posted by on Wednesday, June 13, 2012 at 05:52 PM in Economics, Monetary Policy | Permalink  Comments (14) 

                                                                                    Does Inequality Lead to a Financial Crisis?

                                                                                    Via an email, more on inequality and crises:

                                                                                    Does Inequality Lead to a Financial Crisis?, by Michael D. Bordo and Christopher M. Meissner: Abstract: The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.

                                                                                      Posted by on Wednesday, June 13, 2012 at 02:28 PM in Academic Papers, Economics, Income Distribution | Permalink  Comments (68) 

                                                                                      Inequality, the Crash, and the Crisis: The Question of Causality

                                                                                      Part 2 of this series promised to establish a causal link between inequality and the crisis. Once again, this relies upon middle and lower income consumers accumulating excessive debt as they attempt to keep up with their wealthier neighbors:

                                                                                      Inequality, the crash and the crisis. Part 2: A model of capitalism that fails to share the fruits of growth, by Stewart Lansley: The driving force behind the widening income gap of the last thirty years has been a shift in the distribution of “factor shares” – the way the output of the economy is divided between wages and profits. ...
                                                                                      This process of decoupling wages from output has led to a growing “wage-output gap”, with a very profound, and negative, impact on the way economies function. This is for three key reasons. First, by cutting the purchasing power needed to buy the extra output being produced, the long wage squeeze brought domestic and global deflation. Consumer societies started to lose the capacity to consume.
                                                                                      The solution to this problem – which would have brought a prolonged recession much earlier – was to allow an explosion in private debt to fill the demand gap. ... In the US, debt reached a third more than national income by 2008. This helped to fuel a domestic boom from the mid-1990s but was never going to be sustainable. Far from preventing recession, it just delayed it.
                                                                                      The same factors were at work in the 1920s. The 1929 Crash was preceded by a sharp rise in inequality with the resulting demand gap also filled by an explosion in private debt. In 1920s America, the ratio of household debt to national income rose by 70 per cent in less than a decade.
                                                                                      Second, the intensified concentration of income led to the growth of a tidal wave of global footloose capital – a mix of corporate surpluses and burgeoning personal wealth. According to the pro-inequality theorists, these growing surpluses should have led to a boom in productive investment. Instead, they ended up fuelling commodity speculation, financial engineering and hostile corporate raids, activity geared more to transferring existing rather than creating new wealth and reinforcing the shift towards greater inequality.
                                                                                      Little of this benefitted the real economy. ... Again there are striking parallels with the 1920s...
                                                                                      Third, the effect of these trends has been to intensify the concentration of power with wealth and economic decision-making heavily concentrated in the hands of a tiny minority. ... A new elite has been able to exercise their muscle to ensure that economic policies work in their interest. Hence the inaction on tax havens, the blind-eye approach to tax avoidance and the scaling back of regulations on ... Wall Street, policies that have simultaneously accentuated the risk of economic failure. ...
                                                                                      The economic thrust of the last thirty years – greater reliance on markets, the weakened bargaining power of labour and hiked fortunes at the top – was aimed at dealing with the crisis of the 1970s, a mix of “stagflation” (stagnation and rising inflation ) and falling productivity. It succeeded in squeezing out inflation but replaced these fault lines with an equally toxic mix – global deflation, rising indebtedness and booming asset prices – that eventually brought economic collapse.

                                                                                        Posted by on Wednesday, June 13, 2012 at 02:28 PM in Economics, Income Distribution | Permalink  Comments (32) 

                                                                                        Fed Watch: Is Anyone Answering the Phones at the ECB?

                                                                                        Tim Duy:

                                                                                        Is Anyone Answering the Phones at the ECB?, by Tim Duy: As of today, the Spanish bank bailout remains a phenomenal policy failure. Spanish bond yields continue to rise, with the impact of the ECB's LTRO operations now effectively negated:


                                                                                        Worse, this policy disaster extends now into Italy, with short term debt now taking a hit:

                                                                                        The Rome-based Treasury sold the one-year bills at 3.972 percent, 1.63 percentage points more than the 2.34 percent at the previous auction on May 11. Investors bid for 1.73 times the amount offered, down from 1.79 times last month.

                                                                                        And long-term yields in Italy are heading higher as well:


                                                                                        The only player left on the field that can move fast enough and with enough firepower to pull Europe back from the brink is the ECB, and the pressure is on them to act. From Bloomberg:

                                                                                        Spanish Prime Minister Mariano Rajoy said today he’ll “battle” central bankers refusing to buy debt from peripheral nations. Rajoy published a letter to European Union leaders calling for the European Central Bank to buy debt from the countries struggling to shore up their finances.

                                                                                        “That is the battle we have to wage in Europe,” Rajoy told the Spanish parliament in Madrid today. “I am waging it.” His Italian counterpart, Mario Monti, told lawmakers in Rome Europe faces a “crucial” moment.

                                                                                        The leaders of southern Europe’s biggest economies went on the offensive as bond yields jumped following the announcement of a bailout for Spanish banks that was intended to quell concern over the countries’ finances. The decline wiped out the effects of 1 trillion euros in ECB loans for euro-region banks that had held yields in check since December.

                                                                                        Truly desperate pleas, but will they fall on deaf ears? For their part, the ECB seems content build upon the policy inaction at the last policy meeting and continue to do nothing:

                                                                                        Bundesbank board member Andreas Dombret this week said the ECB won’t buy more government bonds to ease the market tensions while Swedish central bank governor Stefan Ingves today said it’s hard to see what else the ECB could do for Spanish lenders.

                                                                                        “We have done our part,” Dombret said in a June 11 interview in London. “Now it’s up to the political leaders to deliver on the fiscal and structural policy side.”

                                                                                        It is never a good sign when the monetary authority - the lender of last resort - is no longer willing to buy your bonds. If the ECB sees only risk at these rates, why should private investors jump into the pool?

                                                                                        Honestly, I find it incomprehensible to believe that the ECB will not soon come to the aid of Spain and Italy with additional bond purchases. Only the most irresponsible policy body would take such a risk. To not do so almost guarantees the destruction of the Eurozone and a deepening recession if not depression throughout Europe. They cannot possibly believe that fiscal and structural reforms will bear sufficient fruit in any reasonable time frame. Nor can they possibly believe that Spain and Italy can implement a IMF-type structural reform program in the absence of the competitive boost provided by currency devaluation.

                                                                                        Or can they? If they do believe these things - that they can do no more, the job is entirely on the shoulders of fiscal policymakers - then we all need to be afraid, very afraid. Because when the ECB fully abdicates its role as a provider of financial stability for the Eurozone, all Hell is going to break loose.

                                                                                          Posted by on Wednesday, June 13, 2012 at 10:51 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (16) 

                                                                                          Did Income inequality Contribute to the Great Recession?

                                                                                          I recently questioned the strength of the evidence supporting the hypothesis that income inequality caused the Great Recession. Till van Treeck explains why we should believe its causal:

                                                                                          How income inequality contributed to the Great Recession, by Till van Treeck, Commentary, guardian.co.uk: The idea that the Great Recession of 2008 may have been caused not just by careless banking but also social inequality is currently all the rage among macroeconomists.
                                                                                          Much of the impetus for the current debate stems from the widely discussed 2010 book Fault Lines, written by Raghuram Rajan... Rajan argues that many lower- and middle-class consumers in the United States have reacted to the stagnation of their real incomes since the early 1980s by reducing saving and increasing debt. This has temporarily kept private consumption and thus aggregate demand and employment high, but also contributed to the creation of the credit bubble which eventually burst.
                                                                                          In Rajan's view, a large portion of the blame for this falls on misguided government policies, which promoted the expansion of credit to households. ...
                                                                                          In 1996, Alan Greenspan, then chairman of the Federal Reserve Bank, noted in response to growing concerns about rising inequality that "wellbeing is determined by things people consume [and] disparities in consumption … do not appear to have widened nearly as much as income disparities". In a similar vein, Fabrizio Perri and Dirk Krueger suggested in an influential scholarly article published in 2006 that "consumers could, and in fact did, make stronger use of credit markets exactly when they needed to (starting in the mid-1970s), in order to insulate consumption from bigger income fluctuations". ...
                                                                                          There is ample evidence that, especially in the US, households reacted to higher inequality by working longer hours, lowering savings, and increasing debt in an attempt to maintain their relative consumption status. Up to a point this allowed them to pay for medical bills, the ever-increasing costs of children's college education and a house; but eventually the bubble burst. ...
                                                                                          The renewed interest among economists in inequality as a macroeconomic risk is highly encouraging. Undoubtedly more research is needed to pin down the macroeconomic implications of inequality under different country-specific circumstances. But it should be clear that, in hindsight, the dominant textbook economic theories of consumption look almost as toxic as some of the credit products that ultimately caused the crisis.

                                                                                          A couple of things. First, new evidence suggests that consumption inequality has been just as bad as income inequality. That casts doubt on stories that rely upon consumers using debt to finance consumption growth while income remained stagnant. Second, the story is more consistent with a general credit bubble than a bubble in housing in particular. Third, I have pushed back strongly against stories that say the crisis was caused by government support of housing programs to lower income households. The evidence for this simply isn't there.

                                                                                          Again, I am not saying that the evidence stacks up against the idea that inequality contributed to the recession, it could very well be true. What I'm saying is that the evidence I'm aware of doesn't tell us much one way or the other. (And I certainly don't want to imply that there are no problems associated with rising inequality beyond the risk of credit bubbles.)

                                                                                            Posted by on Wednesday, June 13, 2012 at 10:24 AM in Economics, Income Distribution | Permalink  Comments (32) 

                                                                                            Fed Watch: Easing Seems Likely, But of What Form?

                                                                                            Tim Duy:

                                                                                            Easing Seems Likely, But of What Form?, by Tim Duy: The Federal Reserve meeting is bearing down upon us. We have witnessed a variety of Fed views across the spectrum over the past two weeks presenting a number of options: Continue Operation Twist, expand balance sheet operations, extend the forward guidance, other non-specified communication tools, or just plain do nothing. I would say on net the balance of talk leans toward some kind of action, although we do not know the intentions of Federal Reserve Chairman Ben Bernanke. There was no strong hint in his testimony last week. Given his revealed preferences over the past six months, I tend to believe that he is hesitant to undertake additional balance sheet operations at this time. I don't think he sees the appropriate risk/reward trade off for such an action. An extension of Operation Twist (limited though by the Fed's dwindling supply of short-term securities) seems to be a reasonable middle ground (I was probably a little pessimistic on this point last week), as it at least doesn't move policy backwards.

                                                                                            Last week, San Francisco Federal Reserve President John Williams presented a rather dour economic forecast:

                                                                                            Putting it all together, my forecast calls for real gross domestic product to expand at a moderate pace of about 2¼ percent this year and about 2½ percent next year. I expect the unemployment rate to remain at or a bit above 8 percent for the remainder of this year, and then gradually decline to a little above 7 percent by the end of 2014.

                                                                                            More important for policy is his view of the risks to that forecast:

                                                                                            However, the uncertainty around this forecast is great.

                                                                                            Notably, not only is the uncertainty great, he appears to believe that the vast majority is tail risk on the wrong side of his forecast. Europe featured prominently as a risk, with his conclusion:

                                                                                            Recurrent spikes in fear and uncertainty are followed by piecemeal actions that buy time. What hasn’t emerged is a credible, comprehensive solution to Europe’s problems.

                                                                                            The single biggest reason for the Fed to ease next week is the ongoing European turmoil. Reading between the lines, it seems clear that Williams - and I suspect this sentiment is pervasive on Constitution Ave. - believes the Europeans are generally clueless and institutionally incapable of resolving their crisis. If the Fed believes Europe is on the fast track to economic depression, the rational response is to act now to cushion the blow to the US.

                                                                                            Yesterday, Williams widened his scope:

                                                                                            While the global financial system is stronger than it was three years ago, it remains vulnerable. The European sovereign debt crisis threatens banks in that continent, and, by extension, elsewhere. Clearly, it represents a significant threat to financial stability. In the worst case, the European crisis could undermine the financial improvements in North America and Asia. But this crisis is by no means the only risk. Economic trends in many parts of the world appear to be deteriorating. Although growth in the United States remains moderate, Europe looks to be in recession. And, in China, recent indicators point to a marked deceleration in growth. Many large global financial institutions remain highly leveraged and rely on volatile wholesale funding. Others are still working through troubled loan portfolios. Efforts by regulators to close loopholes exposed by the crisis remain a work in progress. They will take years to complete.

                                                                                            In other words, the world has only deteriorated further in the last week. How should the Fed respond? Williams was a little cagey last week:

                                                                                            In sum, I see the Fed falling short on both our maximum employment and inflation mandates for some time. And the turmoil in Europe and government fiscal retrenchment in the United States raise the danger that the economy could perform worse than I expect. For these reasons, it’s crucial that we maintain our current highly stimulatory monetary policy stance. As part of this, we’ve stated our intention to keep our benchmark short-term interest rate at exceptionally low levels at least through late 2014.

                                                                                            We must also stand ready to do even more if needed to best achieve our statutory goals of maximum employment and price stability....

                                                                                            I find this irritating - Williams sees the Fed falling short of its mandate, with the risks all on the downside, yet his response is that we should just maintain existing policy? Apparently, we need things to get worse:

                                                                                            ...If the outlook for growth worsens to the point that we no longer expect to make sustained progress on bringing the unemployment rate down to levels consistent with our dual mandate, or if the medium-term outlook for inflation falls significantly below our 2 percent target, then additional monetary accommodation would be warranted.

                                                                                            What I think is going on is that, left to his own devices, Williams would have eased already, and is certainly even more inclined to do so given the deteriorating economic environment in the last week alone. He is not willing to call for additional easing directly, however, as he doesn't want to risk contradicting the decision of the FOMC.

                                                                                            How should the Fed proceed? According to Williams:

                                                                                            In such circumstances, an effective tool would be further purchases of longer-maturity securities, potentially including agency mortgage-backed securities. Past purchases have succeeded in lowering borrowing costs and improving financial conditions, thereby supporting economic recovery.

                                                                                            I highlight this line because it differs slightly from what Yellen said last week:

                                                                                            If the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective, I am convinced that scope remains for the FOMC to provide further policy accommodation either through its forward guidance or through additional balance-sheet actions.

                                                                                            Yellen includes forward guidance as a tool, although she later notes that:

                                                                                            ...the effects of forward guidance are likely to be weaker the longer the horizon of the guidance, implying that it may be difficult to provide much more stimulus through this channel.

                                                                                            The communications tool could be an alternative to balance sheet tools at this next FOMC meeting. The same thought was reiterated yesterday by Atlanta Federal Reserve President Dennis Lockhart, although he is not in the easing camp just yet:

                                                                                            "I don't think any of the options should be taken off the table under the current circumstances. But I'm not convinced at this moment that the circumstances quite yet call for additional action," Lockhart told reporters.

                                                                                            He added that an adjustment to the way the U.S. central bank communicates, as opposed to asset purchases, is a possible easing tool if needed.

                                                                                            As an aside, Lockhart disappoints with this:

                                                                                            "It remains to be seen whether that picture holds, therefore it remains to be seen whether we might need further action to sustain that level of attractive interest rates for borrowers," Lockhart said of the ultra low yields.

                                                                                            "It does in some respects take the pressure off, to do something about financial conditions per se," he added.

                                                                                            He sees lower yields as an excuse not to act. The correct response is to see yields as a signal that they should act.

                                                                                            My instinct is that the Fed will want to take some action at the next meeting. As a baseline, consider this concluding remark from David Altig and John Robertson:

                                                                                            In such an environment, it is probably good to remember that standing pat with central bank asset purchases does not necessarily mean standing still with monetary policy.

                                                                                            Doing nothing is not an option. But I sense they will not be eager to expand the balance sheet. I am having trouble seeing Federal Reserve Chairman Ben Bernanke as wanting to pursue the latter option without what he feels is a compelling financial or economic reason. Perhaps I am too pessimistic on this point, but whenever I read the list of current FOMC voting members I see a group of people that well before today wanted to ease more or were willing to ease more if Bernanke has pushed in that direction. It's not the official "hawks," but "hawk-light" Bernanke that is the obstacle to additional asset purchases.

                                                                                            The Fed could opt for a communications only strategy. But of what form would the communication take? Optimally, I would be hopeful for the state-contingent approach that Chicago Federal Reserve President Charles Evans once again promoted today:

                                                                                            The Chicago Fed chief again lobbied for the central bank to take more aggressive steps to stimulate growth.

                                                                                            The Fed’s current policy is to keep the short-term federal-funds rate near zero at least through late 2014. Mr. Evans favors “improved forward guidance” for conditions that would warrant a funds rate increase. He would like to see the Fed specify that it won’t raise the rate until the U.S. unemployment rate falls below 7%, or if inflation rises above 3%, which is above the Fed’s 2% inflation target.

                                                                                            A 7% jobless rate is still too high, “but it’s in the right direction,” Mr. Evans said.

                                                                                            A clearer policy about the Fed’s “forward intentions” for the funds rate would eliminate some of the uncertainty among hesitant entrepreneurs, he added.

                                                                                            The challenge I see is that I can't imagine Bernanke willing to accept inflation up to 3%. I just don't see it happening. I don't think the Fed is ready to provide guidance dependent on economic outcomes, and certainly not anything that contradicts their newly minted statement committing to a 2% inflation target.

                                                                                            Excluding the Evans approach, what is left? Extending the horizon of the period of low rates, which Yellen suggests is not particularly effective? Moreover, I am not sure they have enough clarity on the economic outlook to extend the horizon on exceptionally low rates, which just proves how unwieldy this tool really is. It would be so much easier to set up macroeconomic targets that would trigger a rate hike rather than an arbitrary time frame. Possibly just a sternly worded easing bias given the prevalence of downside risks? I do worry that the latter is all we will get next week.

                                                                                            Bottom Line: The Fed is running out of room to maneuver in the absence of expanding the balance sheet further. And I don't see that Bernanke wants to take that road in the absence of a more significant downturn in the economy. They can continue Operation Twist, but they have limited room on that front given the dwindling supply of short-term assets. Some sort of communication tool is also on the table. Absolutely nothing is not really on the table. So my expectations at this point, in order of likelihood are: 1.) Continue Operation Twist , 2.) communicate a clear easing bias with a hair-trigger, 3.) combine communication with continuing Operation Twist, making is clear that if conditions deteriorate further, Operation Twist will be converted to outright asset purchases when the scope for twisting ends, or 4.) additional asset purchases.

                                                                                            Sorry for the long post; this is a tough nut to crack. Too many options; this was easier when it was all about 25bp.

                                                                                              Posted by on Wednesday, June 13, 2012 at 12:22 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (35) 

                                                                                              Links for 06-13-2012

                                                                                                Posted by on Wednesday, June 13, 2012 at 12:06 AM in Economics, Links | Permalink  Comments (63) 

                                                                                                Tuesday, June 12, 2012

                                                                                                Eichengreen: Share the Work

                                                                                                One more from Barry Eichengreen -- like Dean Baker, he supports work sharing as a way to create more jobs and increase employment:

                                                                                                Share the Work, by Barry Eichengreen, Commentary, Project Syndicate: The United States today is facing a crisis of long-term unemployment unlike anything it has seen since the 1930’s. Some 40% of the unemployed have been out of work for six months or more... For those unfortunate enough to experience it, long-term unemployment ... is a tragedy. And, for society as a whole, there is the danger that the productive capacity of a significant portion of the labor force will be impaired.
                                                                                                What is not well known, however, is that in the 1930’s, the United States, to a much greater extent than today, succeeded in mitigating these problems. Rather than resorting to extensive layoffs, firms had their employees work a partial week. ... The 24% unemployment reached at the depths of the Great Depression was no picnic. But that rate would have been even higher had average weekly hours for workers in manufacturing remained at 45. Cutting hours by 20% allowed millions of additional workers to stay on the job. ...
                                                                                                Why was there so much work-sharing in the 1930’s? One reason is that government pushed for it. ... Second, legislation encouraged it. ... [Today,] unemployment insurance ... could be restructured to encourage it. Partial benefits could be paid to workers on short hours...
                                                                                                In fact, the US already has something along these lines: a program known as Short-Time Compensation. Workers can collect unemployment benefits pro-rated according to their hours... Unfortunately, the financial incentives that the federal government provides are ... limited... And those programs, in turn, are too modest...
                                                                                                Other countries have gone further. ...Germany, for example... The US federal government could emulate this example by compensating the states more generously for their Short-Term Compensation programs. Its failure to do so not only inflicts avoidable pain and suffering on the unemployed, but also threatens to inflict long-term costs on American society.

                                                                                                The unemployment problem ought to be a national emergency. The fact that it's not tells me that our political institutions are broken, at least when it comes to defending the interests of the working class (other interests are anything but ignored). Millions of people are struggling to get by without a job, and instead of mobilizing on their behalf and finding some way to make things better -- there is plenty to do and plenty of people who would be glad to do it -- some policymakers are calling them lazy and trying to make it even worse by cutting what help they do get, while others who ought to know better stand by passively watching this happen, or worse join the cause. We can do better than this, but it has to be a priority for those who control the levers of power. Unfortunately, in our dysfunctional political system, improving the lives of the working class is less a priority than serving the interests of those who finance, and hence hold the keys to, reelection.

                                                                                                  Posted by on Tuesday, June 12, 2012 at 03:28 PM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (50) 

                                                                                                  GOP Moderates versus GOP Extremists

                                                                                                  David Frum on Twitter:

                                                                                                  Jeb Bush, you picked this fight. Now win it. Don't back down!

                                                                                                  Do the Bruce Bartletts, David Frums, and Jeb Bushes in the GOP have any chance of reclaiming the Party and bringing it back to sanity? If Republicans lose the election, the after-loss soul-searching will likely conclude that extremism was a problem, and perhaps there's a chance for more moderate voices to take control. But if Republicans win (shudder), the rightward drift on both sides of the political aisle is likely to continue. We will not be a "kinder, gentler" nation.

                                                                                                    Posted by on Tuesday, June 12, 2012 at 01:11 PM in Economics, Politics | Permalink  Comments (40) 

                                                                                                    'A Rerun of Europe in 1931'

                                                                                                    Brad DeLong and Barry Eichengreen describe how, to their "surprise, alarm and dismay, we find ourselves watching a rerun of Europe in 1931" in this new introduction to Charles Kindleberger's book World in Depression, 1929-1939:

                                                                                                    New preface to Charles Kindleberger, The World in Depression 1929-1939, by J. Bradford DeLong and Barry Eichengreen, Vox EU: The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.

                                                                                                    Both the existence of these parallels and their tragic nature would not have escaped Charles Kindleberger, whose World in Depression, 1929-1939 was published exactly 40 years ago, in 1973.1  Where Kindleberger's canvas was the world, his focus was Europe. While much of the earlier literature, often authored by Americans, focused on the Great Depression in the US, Kindleberger emphasized that the Depression had a prominent international and, in particular, European dimension. It was in Europe where many of the Depression’s worst effects, political as well as economic, played out. And it was in Europe where the absence of a public policy authority at the level of the continent and the inability of any individual national government or central bank to exercise adequate leadership had the most calamitous economic and financial effects.2

                                                                                                    These were ideas that Kindleberger impressed upon generations of students as well on his reading public. Indeed, anyone fortunate enough to live in New England in the early 1980s and possessed of even a limited interest in international financial and monetary history felt compelled to walk, drive or take the T (as metropolitan Boston’s subway is known to locals) down to MIT's Sloan Building in order to listen to Kindleberger’s lectures on the subject (including both the authors of this preface). We understood about half of what he said and recognized about a quarter of the historical references and allusions. The experience was intimidating: Paul Krugman, who was a member of this same group and went on to be awarded the Nobel Prize for his work in international economics, has written how Kindleberger's course nearly scared him away from international macroeconomics. Kindleberger's lectures were surely “full of wisdom", Krugman notes. But then, “who feels wise in their twenties?" (Krugman 2002).

                                                                                                    There was indeed much wisdom in Kindleberger’s lectures, about how markets work, about how they are managed, and especially about how they can go wrong. It is no accident that when Martin Wolf, dean of the British financial journalists, challenged then former-US Treasury Secretary Lawrence Summers in 2011 to deny that economists had proven themselves useless in the 2008-9 financial crisis, Summers's response was that, to the contrary, there was a useful economics. But what was useful for understanding financial crises was to be found not in the academic mainstream of mathematical models festooned with Greek symbols and complex abstract relationships but in the work of the pioneering 19th century financial journalist Walter Bagehot, the 20th-century bubble theorist Hyman Minsky, and "perhaps more still in Kindleberger" (Wolf and Summers 2011).

                                                                                                    Summers was right. We speak from personal experience: for a generation the two of us have been living – very well, thank you – off the rich dividends thrown off by the intellectual capital that we acquired from Charles Kindleberger, earning our pay cheques by teaching our students some small fraction of what Charlie taught us. Three lessons stand out, the first having to do with panic in financial markets, the second with the power of contagion, the third with the importance of hegemony.

                                                                                                    First, panic. Kindleberger argued that panic, defined as sudden overwhelming fear giving rise to extreme behavior on the part of the affected, is intrinsic in the operation of financial markets. In The World in Depression he gave the best ever “explain-and-illustrate-with-examples” answer to the question of how and why panic occurs and financial markets fall apart. Kindleberger was an early apostate from the efficient-markets school of thought that markets not just get it right but also that they are intrinsically stable. His rival in attempting to explain the Great Depression, Milton Friedman, had famously argued that speculation in financial markets can’t be destabilizing because if destabilizing speculators drive asset values away from justified, or equilibrium, levels, such speculators will lose money and eventually be driven out of the market.3  Kindleberger pushed back by observing that markets can continue to get it wrong for a very, very long time. He girded his position by elaborating and applying the work of Minsky, who had argued that markets pass through cycles characterized first by self-reinforcing boom, next by crash, then by panic, and finally by revulsion and depression. Kindleberger documented the ability of what is now sometimes referred to as the Minsky-Kindleberger framework to explain the behavior of markets in the late 1920s and early 1930s – behavior about which economists otherwise might have arguably had little of relevance or value to say. The Minsky paradigm emphasizing the possibility of self-reinforcing booms and busts is the organizing framework of The World in Depression. It then comes to the fore in all its explicit glory in Kindleberger’s subsequent book and summary statement of the approach, Mania, Panics and Crashes.4

                                                                                                    Kindleberger’s second key lesson, closely related, is the power of contagion. At the centre of The World in Depression is the 1931 financial crisis, arguably the event that turned an already serious recession into the most severe downturn and economic catastrophe of the 20th century. The 1931 crisis began, as Kindleberger observes, in a relatively minor European financial centre, Vienna, but when left untreated leapfrogged first to Berlin and then, with even graver consequences, to London and New York. This is the 20th century’s most dramatic reminder of quickly how financial crises can metastasize almost instantaneously. In 1931 they spread through a number of different channels. German banks held deposits in Vienna. Merchant banks in London had extended credits to German banks and firms to help finance the country’s foreign trade. In addition to financial links, there were psychological links: as soon as a big bank went down in Vienna, investors, having no way to know for sure, began to fear that similar problems might be lurking in the banking systems of other European countries and the US. In the same way that problems in a small country, Greece, could threaten the entire European System in 2012, problems in a small country, Austria, could constitute a lethal threat to the entire global financial system in 1931 in the absence of effective action to prevent them from spreading. This brings us to Kindleberger’s third lesson, which has to do with the importance of hegemony, defined as a preponderance of influence and power over others, in this case over other nation states. Kindleberger argued that at the root of Europe’s and the world’s problems in the 1920s and 1930s was the absence of a benevolent hegemon: a dominant economic power able and willing to take the interests of smaller powers and the operation of the larger international system into account by stabilizing the flow of spending through the global or at least the North Atlantic economy, and doing so by acting as a lender and consumer of last resort. Great Britain, now but a middle power in relative economic decline, no longer possessed the resources commensurate with the job. The rising power, the US, did not yet realize that the maintenance of economic stability required it to assume this role. In contrast to the period before 1914, when Britain acted as hegemon, or after 1945, when the US did so, there was no one to stabilize the unstable economy. Europe, the world economy’s chokepoint, was rendered rudderless, unstable, and crisis- and depression-prone. That is Kindleberger’s World in Depression in a nutshell. As he put it in 1973:

                                                                                                    “The 1929 depression was so wide, so deep and so long because the international economic system was rendered unstable by British inability and United States unwillingness to assume responsibility for stabilizing it in three particulars: (a) maintaining a relatively open market for distress goods; (b) providing counter-cyclical long-term lending; and (c) discounting in crisis…. The world economic system was unstable unless some country stabilized it, as Britain had done in the nineteenth century and up to 1913. In 1929, the British couldn't and the United States wouldn't. When every country turned to protect its national private interest, the world public interest went down the drain, and with it the private interests of all…”

                                                                                                    Subsequently these insights stimulated a considerable body of scholarship in economics, particularly models of international economic policy coordination with and without a dominant economic power, and in political science, where Kindleberger’s “theory of hegemonic stability” is perhaps the leading approach used by political scientists to understand how order can be maintained in an otherwise anarchic international system.5

                                                                                                    It might be hoped that something would have been learned from this considerable body of scholarship. Yet today, to our surprise, alarm and dismay, we find ourselves watching a rerun of Europe in 1931. Once more, panic and financial distress are widespread. And, once more, Europe lacks a hegemon – a dominant economic power capable of taking the interests of smaller powers and the operation of the larger international system into account by stabilizing flows of finance and spending through the European economy. The ECB does not believe it has the authority: its mandate, the argument goes, requires it to mechanically pursue an inflation target – which it defines in practice as an inflation ceiling. It is not empowered, it argues, to act as a lender of the last resort to distressed financial markets, the indispensability of a lender of last resort in times of crisis being another powerful message of The World in Depression. The EU, a diverse collection of more than two dozen states, has found it difficult to reach a consensus on how to react. And even on those rare occasions where it does achieve something approaching a consensus, the wheels turn slowly, too slowly compared to the crisis, which turns very fast.

                                                                                                    The German federal government, the political incarnation of the single most consequential economic power in Europe, is one potential hegemon. It has room for countercyclical fiscal policy. It could encourage the European Central Bank to make more active use of monetary policy. It could fund a Marshall Plan for Greece and signal a willingness to assume joint responsibility, along with its EU partners, for some fraction of their collective debt. But Germany still thinks of itself as the steward is a small open economy. It repeats at every turn that it is beyond its capacity to stabilize the European system: “German taxpayers can only bear so much after all”. Unilaterally taking action to stabilize the European economy is not, in any case, its responsibility, as the matter is perceived. The EU is not a union where big countries lead and smaller countries follow docilely but, at least ostensibly, a collection of equals. Germany’s own difficult history in any case makes it difficult for the country to assert its influence and authority and equally difficult for its EU partners, even those who most desperately require it, to accept such an assertion.6 Europe, everyone agrees, needs to strengthen its collective will and ability to take collective action. But in the absence of a hegemon at the European level, this is easier said than done.

                                                                                                    The International Monetary Fund, meanwhile, is not sufficiently well capitalized to do the job even were its non-European members to permit it to do so, which remains doubtful. Viewed from Asia or, for that matter, from Capitol Hill, Europe’s problems are properly solved in Europe. More concretely, the view is that the money needed to resolve Europe’s economic and financial crisis should come from Europe. The US government and Federal Reserve System, for their part, have no choice but to view Europe’s problems from the sidelines. A cash-strapped US government lacks the resources to intervene big-time in Europe’s affairs in 1948; there will be no 21st century analogue of the Marshall Plan, when the US through the Economic Recovery Program, of which the young Charles Kindleberger was a major architect, extended a generous package of foreign aid to help stabilize an unstable continent. Today, in contrast, the Congress is not about to permit Greece, Ireland, Portugal, Italy, and Spain to incorporate in Delaware as bank holding companies and join the Federal Reserve System.7

                                                                                                    In a sense, Kindleberger predicted all this in 1973. He saw the power and willingness of the US to bear the responsibility and burden of sacrifice required of benevolent hegemony as likely to falter in subsequent generations. He saw three positive and three negative branches on the then-future's probability tree. The positive outcomes were: "[i] revived United States leadership… [ii] an assertion of leadership and assumption of responsibility... by Europe…” [sitting here, in 2013, one might be tempted to add emerging markets like China as potentially stepping into the leadership breach, although in practice the Chinese authorities have been reluctant to go there, and] [iii] cession of economic sovereignty to international institutions….” Here, in a sense, Kindleberger had both global and regional – meaning European – institutions in mind. “The last”, meaning a global solution, “is the most attractive”, he concluded,” but perhaps, because difficult, the least likely…" The negative outcomes were: "(a) the United States and the [EU] vying for leadership… (b) one unable to lead and the other unwilling, as in 1929 to 1933… (c) each retaining a veto… without seeking to secure positive programs…"

                                                                                                    As we write, the North Atlantic world appears to have fallen foul to his bad outcome (c), with extraordinary political dysfunction in the US preventing its government from acting as a benevolent hegemon, and the ruling mandarins of Europe, in Germany in particular, unwilling to step up and convince their voters that they must assume the task.

                                                                                                    It was fear of this future that led Kindleberger to end The World in Depression with the observation: “In these circumstances, the third positive alternative of international institutions with real authority and sovereignty is pressing.”

                                                                                                    Indeed it is, more so now than ever.


                                                                                                    Eichengreen, Barry (1987), “Hegemonic Stability Theories of the International Monetary System”, in Richard Cooper, Barry Eichengreen, Gerald Holtham, Robert Putnam and Randall Henning (eds.), Can Nations Agree? Issues in International Economic Cooperation, The Brookings Institution, 255-298.

                                                                                                    Friedman, Milton (1953), “The Case for Flexible Exchange Rates”, in Essays in Positive Economics, University of Chicago Press.

                                                                                                    Friedman, Milton and Anna J Schwartz (1963), A Monetary History of the United States, 1967-1960, Princeton University Press.

                                                                                                    Gilpin, Robert (1987), The Political Economy of International Relations, Princeton University Press.

                                                                                                    Keohane, Robert (1984), After Hegemony, Princeton University Press.

                                                                                                    Kindleberger, Charles (1978), Manias, Panics and Crashes, Norton.

                                                                                                    Krugman, Paul (2003), “Remembering Rudi Dornbusch”, unpublished manuscript, www.pkarchive.org, 28 July.

                                                                                                    Lake, David (1993), “Leadership, Hegemony and the International Economy: Naked Emperor or Tattered Monarch with Potential?”, International Studies Quarterly, 37: 459-489.

                                                                                                    Wolf, Martin and Lawrence Summers (2011), “Larry Summers and Martin Wolf: Keynote at INET’s Bretton Woods Conference 2011”, www.youtube.com, 9 April.

                                                                                                    1 Kindleberger passed away in 2003. A second modestly revised and expanded edition of The World in Depression was then published, also by the University of California Press, in 1986. The second edition differed mainly by responding to the author’s critics and commenting to some subsequent literature. We have chosen to reproduce the ‘unvarnished’ 1973 Kindleberger, where the key points are made in unadorned fashion.

                                                                                                    2 The book was commissioned originally for a series on the economic history of Europe, with each author writing on a different decade. This points to the question of why the title was not, instead, “Europe in Depression.” The answer, presumably, is that the author – and his publisher wished to acknowledge that the Depression was not exclusively a European phenomenon and that the linkages between Europe and the US were also critically important.

                                                                                                    3 Friedman’s great work on the Depression, coauthored with Anna Jacobson Schwartz (1963), was in Kindleberger’s view too monocausal, focusing on the role of monetary policy, and too U.S. centric. See also Friedman (1953)

                                                                                                    4 Kindleberger (1978). Kindleberger amply acknowledged his intellectual debt to Minsky. But we are not alone if we suggest that Kindleberger’s admirably clear presentation of the framework, and the success with which he documented its power by applying it to historical experience, rendered it more impactful in the academy and generally.

                                                                                                    5 A sampling of work in economics on international policy coordination inspired by Kindleberger includes Eichengreen (1987) and Hughes Hallet, Mooslechner and Scheurz (2001). Three important statements of the relevant work in international relations are Keohane (1984), Gilpin (1987) and Lake (1993).

                                                                                                    6 The European Union was created, in a sense, precisely in order to prevent the reassertion of German hegemony.

                                                                                                    7 The point being that the US, in contrast, does possess a central bank willing, under certain circumstances, to acknowledge its responsibility for acting as a lender of last resort. Nothing in fact prevents the Federal Reserve, under current institutional arrangements from, say, purchasing the bonds of distressed Southern European sovereigns. But this would be viewed as peculiar and inappropriate in many quarters. The Fed has a full plate of other problems. And intervening in European bond markets, the argument would go, is properly the responsibility of the leading European monetary authority.

                                                                                                      Posted by on Tuesday, June 12, 2012 at 09:02 AM in Economics | Permalink  Comments (42)