« June 2009 | Main | August 2009 »

Friday, July 10, 2009

Are Small Banks the Answer for Developing Countries?

This week at The Economist:

Justin Lin, the World Bank’s chief economist,... in his guest Economics focus column ... argues that developing countries should base their financial systems on small, local banks:

The size and sophistication of financial institutions and markets in the developed world are not appropriate in low-income markets. Small local banks are the best entities for providing financial services to the enterprises and households that are most important in terms of comparative advantage—be they asparagus farmers in Peru, cut-flower companies in Kenya or garment factories in Bangladesh. The experiences of countries such as Japan, South Korea and China are telling. Those countries managed to avoid financial crises for long stretches of their development as they evolved from low-income to middle- and high-income countries. It helped greatly that they adhered to simple banking systems (rather than rushing to develop their stock markets and integrate into international financial networks) and did not liberalise their capital accounts until they became more advanced.

Mr Lin concludes:

Leave the developed markets to worry about how to reform their highly evolved financial systems. To make sustained progress in lifting the weight of the extreme poverty that will remain after the crisis has subsided, low-income countries need to make their financial institutions small and simple.

Over the course of the next week, we will devote this blog to a discussion of Mr Lin’s column, posting responses from our correspondents, invited experts from the academic and policy worlds, and our commenters. We'll be collecting the entire series of posts here. Do stop by and contribute to the debate.

Here is the lead Essay: Walk, Don't Run by Justin Lin

Here are the responses so far:

Here is my response:

Small banks need help, by Mark Thoma: I agree with many of the points in the article regarding the potential that small and simple banks provide. But while small and simple banks can help to overcome many problems, by themselves they may not be enough fully serve the financial needs within developing countries.

There are two issues here. The first is to determine the types of financial products that best suit the needs of people and businesses within developing countries, and the second is how to best deliver those products to the people and businesses who could benefit from using them.

Small banks and microfinance of the type emphasised in the article can meet many of the financial needs in developing countries, for example the need that farmers have to borrow funds to purchase seed and fertiliser, and then repay the loans at harvest, can be met in this way. But other needs require more sophisticated financial products. The ability to hedge price risk through futures markets, the need for insurance against crop failure, the need to purchase farm equipment through pooling arrangements that share the costs among end users, and the problems brought about by seasonality require more sophisticated products and arrangements. The point is that not all of the financial needs in agricultural, small scale manufacturing, and services are simple, even in developing countries.

Can these more complex financial needs be satisfied, or are there important barriers within developing countries that prevent these products from being used?

Continue reading "Are Small Banks the Answer for Developing Countries?" »

    Posted by on Friday, July 10, 2009 at 10:03 AM in Development, Economics, Financial System | Permalink  Comments (6) 


    Paul Krugman: The Stimulus Trap

    Everybody makes mistakes. But not everyone can admit their mistakes, and then take the steps needed to overcome them:

    The Stimulus Trap, by Paul Krugman, Commentary, NY Times: As soon as the Obama administration-in-waiting announced its stimulus plan — this was before Inauguration Day — some of us worried that the plan would prove inadequate. ...

    The bad employment report for June made it clear that the stimulus was, indeed, too small. But it also damaged the credibility of the administration’s economic stewardship. There’s now a real risk that President Obama will find himself caught in a political-economic trap.

    I’ll talk about that trap, and how he can escape it, in a moment. First, however, let me ... ask how concerned citizens should be reacting to the disappointing economic news. Should we be patient, and give the Obama plan time to work? Should we call for bigger, bolder actions? Or should we declare the plan a failure and demand that the administration call the whole thing off? ...

    When there’s an ordinary, garden-variety recession, the job of fighting that recession is assigned to the Federal Reserve. ... Reducing rates a bit at a time, it keeps cutting until the economy turns around. At times it pauses to assess the effects of its work; if the economy is still weak, the cutting resumes. ...

    Normally, then, we expect policy makers to respond to bad job numbers with a combination of patience and resolve. They should give existing policies time to work, but they should also consider making those policies stronger.

    And that’s what the Obama administration should be doing..., stay calm in the face of disappointing early results,... the plan will take time to deliver its full benefit. But ... be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.

    Unfortunately, the politics of fiscal policy are very different from the politics of monetary policy. For the past 30 years, we’ve been told that government spending is bad, and conservative opposition to fiscal stimulus (which might make people think better of government) has been bitter and unrelenting even in the face of the worst slump since the Great Depression. Predictably, then, Republicans — and some Democrats — have treated any bad news as evidence of failure, rather than as a reason to make the policy stronger.

    Hence the danger that the Obama administration will find itself caught in a political-economic trap, in which the very weakness of the economy undermines the administration’s ability to respond effectively. ... The question is what the president and his economic team should do now.

    It’s perfectly O.K. for the administration to defend what it’s done so far. ... It’s also reasonable for administration economists to call for patience...

    But there’s a difference between defending what you’ve done so far and being defensive. It was disturbing when President Obama walked back Mr. Biden’s admission that the administration “misread” the economy, declaring that “there’s nothing we would have done differently.” There was a whiff of the Bush infallibility complex in that remark, a hint that the current administration might share some of its predecessor’s inability to admit mistakes. And that’s an attitude neither Mr. Obama nor the country can afford.

    What Mr. Obama needs to do is level with the American people. He needs to admit that he may not have done enough on the first try. He needs to remind the country that he’s trying to steer the country through a severe economic storm, and that some course adjustments — including, quite possibly, another round of stimulus — may be necessary.

    What he needs, in short, is to do for economic policy what he’s already done for race relations and foreign policy — talk to Americans like adults.

      Posted by on Friday, July 10, 2009 at 12:24 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (84) 


      Don't Expect a Quick Recovery

      One of the reasons I've argued this recovery will be slow is that we cannot simply bounce back to where we were before the problems started as we could in some past recessions. We need to move resources out of housing, out of finance, and out of autos, and those resources need to find productive employment elsewhere in new or growing industries, and that is not very likely until things improve. Consumers need to save more and consume less, as they are starting to do, and this too will require adjustment. So does this mean we should expect a U-shaped recovery instead of a V-shaped recovery? Robert Reich says it's neither, this is an X-recovery:

      When Will The Recovery Begin? Never., by Robert Reich: The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.

      Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. ... That's where the more sober U-shapers come in. They predict a more gradual recovery...

      Personally, I don't buy into either camp. In a recession this deep, recovery ... depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

      Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. They can't borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. ... Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down...

      Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.

      My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

      The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. ...

        Posted by on Friday, July 10, 2009 at 12:16 AM in Economics | Permalink  Comments (22) 


        "Cities and Stimulus"

        Did cities receive too little of the federal transportation stimulus money?:

        Lisa Schweitzer on Cities and the Stimulus, by Richard Greene: From her blog:

        One of my fantastic students from Virginia Tech, Eric Howard, posted this piece from today’s New York Times on Facebook. The NYT author argues that:

        Two-thirds of the country lives in large metropolitan areas, home to the nation’s worst traffic jams and some of its oldest roads and bridges. But cities and their surrounding regions are getting far less than two-thirds of federal transportation stimulus money.

        The reporter goes on to quote outrage from mayors. They also get information from one of my favorite experts, Rob Puentes at Brookings. As usual, Rob has a very good point here: this package isn’t just about business as usual revenue allocation–which has always had a strong rural bias due to the structure of the Federal representative system (as Owen D. Gutfreund points out). This rural strength made way more sense 150 years ago than it does now.

        So, of course all of these smart people are right in that cities aren’t treated very well in the stimulus, as they aren’t treated very well in Federal politics in general.

        However, we have to ask ourselves: would it really be sensible to hand out this money on a per capita basis either?

        Continue reading ""Cities and Stimulus"" »

          Posted by on Friday, July 10, 2009 at 12:15 AM in Economics | Permalink  TrackBack (0)  Comments (8) 


          links for 2009-07-10

            Posted by on Friday, July 10, 2009 at 12:02 AM in Economics, Links | Permalink  TrackBack (0)  Comments (18) 


            Thursday, July 09, 2009

            "The Fall of the Toxic-Assets Plan"

            I have the same worries, so I would like to hear why we shouldn't be concerned that banks are holding overvalued assets on their balance sheets. What's the counterargument to this?:

            The Fall of the Toxic-Assets Plan,  by Lucian Bebchuk, Real Time Economics: The plan for buying troubled assets — which was earlier announced as the central element of the administration’s financial stability plan — has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks’ new ability to raise capital through stock sales without having to sell toxic assets. ...

            What happened? Banks’ balance sheets do remain clogged with toxic assets, which are still difficult to value. But the willingness of banks to sell toxic assets ... has been killed by decisions of accounting authorities and banking regulators. ...

            Armed with ample government funding, the private managers running funds set under the program would be expected to offer fair value for banks’ assets. Indeed, because the government’s ... non-recourse financing, many have expressed worries that such fund managers would have incentives to pay even more than fair value... The problem, however, is that banks now have strong incentives to avoid selling toxic assets at any price below face value even when the price fully reflects fair value.

            A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets..., banks may avoid recognizing the loss as long as they don’t sell the assets. ...

            In another blow to banks’ potential willingness to sell toxic assets,... bank supervisors conducting stress tests ... explicitly didn’t take into account the decline in the economic value of toxic loans and securities that mature after 2010 and that the banks won’t have to recognize in financial statements until then.

            Together, the policies adopted by accounting and banking authorities strongly discourage banks from selling any toxic assets maturing after 2010 at prices that fairly reflect their lowered value. ... [S]elling would require recognizing losses and might result in the regulators’ requiring the bank to raise additional capital...

            While the market for banks’ toxic assets will remain largely shut down, we are going to get a sense of their value when the FDIC auctions off later this summer the toxic assets held by failed banks taken over by the FDIC. If these auctions produce substantial discounts to face value, they should ring the alarm bells. ... In the meantime, it must be recognized that the curtailing of the PIPP program doesn’t imply that the toxic assets problem has largely gone away; it has been merely swept under the carpet.

              Posted by on Thursday, July 9, 2009 at 11:54 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (29) 


              "Will Europe’s Economies Regain Their Footing?"

              Kenneth Rogoff on the prospects for recovery in Europe:

              Will Europe’s Economies Regain Their Footing?, by Kenneth Rogoff, Commentary, Project Syndicate: What will Europe's growth trajectory look like after the financial crisis? ...

              True, things are pretty ugly right now. ... Yet, ugly or not, the downturn will eventually end. Yes, there is still a real risk of hitting an iceberg, beginning perhaps with a default in the Baltics, with panic first spreading to Austria and some Nordic countries. But, for now, a complete meltdown seems distinctly less likely than gradual stabilization followed by a tepid recovery, with soaring debt levels and lingering high unemployment.

              It is not a pretty picture. Some commentators have savaged Europe's policymakers for not orchestrating as aggressive a fiscal and monetary policy as their U.S. counterparts have. ...

              But these critics seem to presume that Europe will come out of the crisis in far worse shape than the U.S., and it is too early to make that judgment. An epic, financial-crisis-driven recession, such as the one we are still experiencing, is not a one-year event. So policymakers' responses cannot be evaluated by short-term measures... It is just as important to ask what happens over the next five years as over the next six months, and the jury is still very much out on that.

              America's hyper-aggressive fiscal response means a faster rise in government debt, while its hyper-expansive monetary policy means that an exit strategy to mop up all the excess liquidity will be difficult to execute. ... Europe's more tempered approach, while magnifying short-term risks, could pay off in the long run, especially if global interest rates rise, making it far more painful to carry oversized debt loads.

              The real question is not whether Europe is using sufficiently aggressive Keynesian stimulus, but whether Europe will resume its economic reform efforts as the crisis abates. If Europe continues to make its labor markets more flexible, its financial market regulation more genuinely pan-European, and remains open to trade, trend growth can pick up again in the wake of the crisis. If European countries look inward, however, with Germany pushing its consumers to buy German cars, the French government forcing car companies to keep unproductive factories open, etc., one can expect a decade of stagnation.

              Admittedly, the past year has not been a proud one for policy reform in Europe. Recessions have never proven an easy time for ... reforms. ...

              The recent recession has presented challenges, but European leaders were right to avoid becoming intoxicated with short-term Keynesian policies, especially where these are inimical to addressing Europe's long-term challenges.

              If reform resumes, there is no reason why Europe should not enjoy a decade of per capita income growth at least as high as that of the U.S. Moreover, with growing concerns about the sustainability of U.S. fiscal policy, the euro has a huge opportunity to play a significantly larger role as a reserve currency.

              One shudders to think what will happen if Europe does not pull out of its current funk. ...

              European leaders argued they didn't need to be as aggressive as the U.S. at putting new fiscal policy in place because they had much larger social safety nets that would kick in automatically as the crisis deepened. In addition, Europeans noted, they already had much higher levels of government spending as a share of output than the U.S., so it was much harder for them to increase this share further. Another way to say this is that Europeans do not believe they have an inferior short-run response, especially when it comes to labor and providing jobs.

              Thus, the very thing that Rogoff believes is Europe's biggest long-run challenge - the extensive social safety net, including provisions affecting adjustment in labor markets - is the reason why Europe was able and willing to choose a different strategy relative to the U.S. to attenuate the effects of the recession. If the U.S. had European levels of debt and, more importantly, the same degree of social protections for people affected by recession, then the U.S. would not have needed or been able (politically) to increase deficit spending as much as it did. I am among those who believe Europe could have reacted more vigorously, and should have, but I don't think it's correct to say they avoided Keynesian type policy (and see this post concerning France's stimulus package).

              If, in the long-run, we look back and see that Europe's more extensive protections did, in fact, smooth the adjustment to the crisis, the motivation for long run change of the type Rogoff hopes for will diminish. If having European style social protections does lower growth - and that is a debatable assertion - that may be an insurance premium people are willing to pay to avoid more severe downturns. If the opposite happens, if the social safety net does not do its job (and that cannot be measured through unemployment rates alone), then the motivation for change could become stronger. But the crisis is far from over and the jury is still out.

                Posted by on Thursday, July 9, 2009 at 12:24 AM in Economics, Fiscal Policy, Social Insurance | Permalink  TrackBack (0)  Comments (28) 


                "The New Kaldor Facts"

                What does growth theory need to explain? Has there been progress?:

                The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital, by Charles I. Jones and Paul M. Romer, NBER WP 15094, June 2009 [open link]: 1. Introduction ...[I]t is easy to lose faith in scientific progress. ... In any assessment of progress, as in any analysis of macroeconomic variables, a long-run perspective helps us look past the short-run fluctuations and see the underlying trend. In 1961, Nicolas Kaldor stated six now famous “stylized” facts. He used them to summarize what economists had learned from their analysis of 20th-century growth and also to frame the research agenda going forward (Kaldor, 1961):

                  1. Labor productivity has grown at a sustained rate.
                  2. Capital per worker has also grown at a sustained rate.
                  3. The real interest rate or return on capital has been stable.
                  4. The ratio of capital to output has also been stable.
                  5. Capital and labor have captured stable shares of national income.
                  6. Among the fast growing countries of the world, there is an appreciable variation in the rate of growth “of the order of 2–5 percent.”

                Redoing this exercise nearly 50 years later shows just how much progress we have made. Kaldor’s first five facts have moved from research papers to textbooks. There is no longer any interesting debate about the features that a model must contain to explain them. These features are embodied in one of the great successes of growth theory in the 1950s and 1960s, the neoclassical growth model. Today, researchers are now grappling with Kaldor’s sixth fact and have moved on to several others that we list below.

                Continue reading ""The New Kaldor Facts"" »

                  Posted by on Thursday, July 9, 2009 at 12:11 AM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (20) 


                  links for 2009-07-09

                    Posted by on Thursday, July 9, 2009 at 12:04 AM in Economics, Links | Permalink  TrackBack (0)  Comments (26) 


                    Wednesday, July 08, 2009

                    Was it Risk Concentration or Leverage?

                    Ricardo Caballero hasn't given up on his argument that it was the excessive concentration or risk, not leverage, that caused problems in financial markets (and it's an argument I'm sympathetic to):

                    Economic Witch Hunting, by Ricardo Caballero, Commentary, Economists Forum: Perhaps one of the economic phenomena most akin to witch-hunting is the diagnostic and policy response that develops during the recovery phase of a financial crisis. Understandably, pressured politicians and policymakers rush to find culprits... All too often they find a ready supply of these in preconceptions and superficial analyses of correlations. This time around the scapegoats are global imbalances and leverage.

                    Global imbalances are the victim of preconceptions: Many economists and commentators argued before the crisis that large global imbalances would lead to the demise of the U.S. economy... The crisis indeed came, but rather than destabilizing the US economy, capital flows helped to stabilise it, as flight-to-quality capital sought rather than ran away from US assets. ...

                    The fact that the actual mechanism behind the crisis had nothing to do with that which was used to explain the forecast of doom has long being forgotten, false idols have been erected,... global imbalances have been indicted for witchcraft, and ever more exotic rebalancing and currency proposals make it to the front pages of newspapers around the world.

                    Leverage is the victim of superficial analyses of correlations: In my view one of the main factors behind the severity of the financial crisis was the excessive concentration of aggregate risk in highly-leveraged financial institutions. Note that the emphasis is on the concentration of aggregate risk rather than on the much-hyped leverage. The problem in the current crisis was not leverage per se, but the fact that banks had held on to AAA tranches of structured asset-backed securities which were more exposed to aggregate surprise shocks than their rating would, when misinterpreted, suggest.

                    Thus, when systemic confusion emerged, these complex financial instruments quickly soured, compromised the balance sheet of their leveraged holders, and triggered asset fire sales which ravaged balance sheets across financial institutions. The result was a vicious feedback loop between assets exposed to aggregate conditions and leveraged balance sheets.

                    The distinction emphasized in the previous paragraph may seem subtle, but it turns out to have a first order implication for economic policy... The optimal policy response to this problem is not to increase capital requirements (or to deleverage), as the current fashion has it, but to remove the aggregate risk from systemically important leveraged financial institutions’ balance sheets. This should be done through prepaid and often mandatory macro-insurance type arrangements, which can accommodate valid too-big or too-complex to fail concerns, but without crippling the financial industry with the burden of brute-force capital requirements. ...

                    We shouldn't assume that the next potential financial crisis will be identical to this one in terms of how it comes about or how it expresses itself, so we need to ensure that the system can withstand different types of financial shocks. Given that these shocks can come from unexpected places, it's not clear to me that insurance discussed above will stop all of the ways in which financial market problems can lead to harmful deleveraging. Hence, we may want to put the type of insurance plan Ricardo Caballero would like to see instituted in place, and then buttress that protection with enhanced capital requirements to safeguard against unexpected causes of harmful deleveraging.

                      Posted by on Wednesday, July 8, 2009 at 04:50 PM in Economics, Financial System | Permalink  TrackBack (0)  Comments (20) 


                      One Operating System to Rule Them All?

                      Google is moving forward with its plans to develop an operating system:

                      Google Plans a PC Operating System, Helft and Vance, NY Times: In a direct challenge to Microsoft, Google announced ... it is developing an operating system for PCs that is tied to its Chrome Web browser.

                      The software, called the Google Chrome Operating System, is initially intended for use in the tiny, low-cost portable computers known as netbooks... Google said it believed the software would also be able to power full-fledged PCs.

                      The move is likely to sharpen the already intense competition between Google and Microsoft... “Speed, simplicity and security are the key aspects of Google Chrome OS,” said Sundar Pichai ... and Linus Upson ... in a post on a company blog. “We’re designing the OS to be fast and lightweight, to start up and get you onto the Web in a few seconds.”

                      Mr. Pichai and Mr. Upson said that the software would be released online later this year under an open-source license... Netbooks running the software will go on sale in the second half of 2010.

                      The company likely saw netbooks as a unique opportunity to challenge Microsoft, said Larry Augustin, a prominent Silicon Valley investor...

                      “Market changes happen at points of discontinuity,” Mr. Augustin said. “And that’s what you have with netbooks and a market that has moved to mobile devices.” ...

                      Google’s plans for the new operating system fit its Internet-centric vision of computing. Google believes that software delivered over the Web will play an increasingly central role, replacing software programs that run on the desktop. In that world, applications run directly inside an Internet browser, rather than atop an operating system, the standard software that controls most of the operations of a PC.

                      That vision challenges not only Microsoft’s lucrative Windows business but also its applications business, which is largely built on selling software than runs on PCs. ... Google said Tuesday night that it still had work to do to develop a full-fledged operating system. ... [Here's Google's announcement.]

                      I resisted moving from DOS to Windows, and then got stuck on Windows once I did move, so I'm probably not the best judge of whether the model Google is using to challenge Microsoft will be successful, and perhaps both models can survive by serving different needs. However, I've also spent time on mainframe batch and time-share systems where you interact with the mainframe computer through a terminal (screen and keyboard), and Google's vision reminds me of an internet wide version of that system (if I understand it correctly, and I may not). If I want to do simulations of a theoretical model, will it be like graduate school where I had to work very late at night when the system had enough free resources to accommodate my requests without being so slow as to be nearly unusable? PCs freed me from that constraint (but not the late night work habit). It was hard to work at home then as well. It was possible to connect through a phone, but it was very slow, and this was also something PCs changed. You didn't have to be at school to do computer work. If we go to the Google model, will the internet be available broadly and reliably enough so that there won't be frustrating periods when lack of an internet connection means you can't get things done unless you do the equivalent of "going to school where there's a terminal"? And I also like having data backed up locally on my own disks or other media rather than trusting a centralized system to keep it safe for me, and with sensitive data it feels much more secure that way. I suppose this isn't a problem for people who use their computers mainly to browse the internet or send email, But if you use your PC for tasks that require lots of computing power or use sensitive data, I think you have reason to wonder if some of the speed, flexibility, and security PCs give you might be compromised with this system. For that reason, I wonder if Google's model will be able to capture some segments of the market, e.g. those that desire lots of computing power be available nearly on demand. But as I said, if people had listened to me, we'd probably still be using DOS.

                        Posted by on Wednesday, July 8, 2009 at 02:50 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (47) 


                        "Administrative Costs in Health Care"

                        A follow-up to this post on administrative costs in health care:

                        Administrative Costs in Health Care: A Primer, by Ezra Klein: ...Paul Krugman, Greg Mankiw, Tyler Cowen and a handful of others began arguing about [administrative costs]... I'm not convinced any of them have it right.

                        Administrative costs are ... confusing... What counts as an "administrative cost" for a health insurer? We all agree that paying bills counts. But does ... disease management? Advertising? A nurse who dispenses health advice over the telephone? Hard to say. But all of them get grouped under administrative costs at various times. Indeed,... there's not perfect unanimity on how to measure any of this.

                        But most seem to think that Medicare's administrative costs are significantly undersold... An apples-to-apples comparison would not leave you with the 2 percent of total Medicare spending often bandied about in debate. That doesn't count, for instance, Medicare's premium collection, which is done through the ... IRS. Nor does it count most of Medicare's billing, which is outsourced -- and this might surprise people -- to private insurers like Blue Cross Blue Shield and listed under vendor services rather than program administration. A more straightforward estimate ... would be in the range of 5 to 6 percent.

                        Nor is it easy to measure administrative costs among private insurers. For one thing, which private insurers? ... Among employer-based plans, the largest firms had the lowest costs. Plans covering companies with at least 1,000 employees had a mere 7 percent in administrative costs. Those covering companies with fewer than 25 employees spent 26 percent of premiums on administration. And the individual market was a mess: 30 percent.

                        This tells us ... size matters. The most important predictor of administrative costs is not whether the plan is public or private, but whether it is large. ...

                        But administrative costs among ... insurers ... are only part of the story. And they may not even be the most important part. The hospitals and physicians ... are spending tremendous sums of money too. Hospitals ... employ people to argue over claims and navigate the rules of the dozen or so different insurance plans they contract with. And here the experts were unanimous: The problem is that the system is fractured. There's no standardization..., every insurer is complicated in its own way. And that complexity costs a lot of money.

                        As of now, no one I spoke with knew of good data separating the costs of dealing with Medicare and with private insurers. But there are studies comparing Canada and the United States that show a single payer vastly reduces administrative spending. ...

                        But ... slashing administrative costs ... will never be a panacea... Rick Kronick, a political scientist at the University of California at San Diego,... summed the situation up quite well. "The main question," he said, "is why are health care costs going up at 2.4 percent a year faster than GDP? And most of the answers to that question have nothing to do with administrative costs. The answers are that we do more stuff and have more technology. Even if we could wring administrative savings out of the system, which ... would be a good thing, we'd still be facing the question of how to slow the rate of cost growth."

                          Posted by on Wednesday, July 8, 2009 at 01:45 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (33) 


                          links for 2009-07-08

                            Posted by on Wednesday, July 8, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (25) 


                            Tuesday, July 07, 2009

                            "Economists on Trial"

                            This is part of an interview of heterodox economist Michael Perelman:

                            Michael Perelman, on Market Myths, Past and Present, by Seth Sandronsky: ...[Seth] Sandronsky The Depression of the 1930's changed the public policy views of some in the economics profession. In brief, what were the main changes, and how do they connect with the post-bubble economy of mid-2009?

                            Perelman The Great Depression severely tarnished economists' reputations. For example, The Economist published an article on 17 June 1933, entitled "Economists on Trial," which described a "mock-trial - not entirely mockery -" of "the economists." The trial was staged at the London School of Economics, with Robert Boothby, M.P., representing "the state of the popular mind." He accused the economists with "conspiring to spread mental fog," charging that they "were unintelligible; that they had in general proved wrong; and that in any case they all disagreed." The economists - Sir William Beveridge, Sir Arthur Salter, Professor T. E. Gregory, and Hubert Henderson - were all highly respected in the field. They answered Boothby's charges without wholly refuting them. The article concluded, "There was never a time when the advice of an expert was so often asked and so seldom followed as the present." According to the magazine, the problem was that the authorities did not listen to the economists.

                            At the same time, during the New Deal economists played a very prominent role. For the most part, they had not previously been among the doctrinaire defenders of laissez-faire. But keep in mind that, until the post-World War II era, the economics profession was much more diverse. A good number of progressive economists had been purged from academia, but some progressives remained. The more elite a university was, the less diversity it had. Yet, even in elite universities there was a modicum of diversity.

                            Although the discipline of economics became radically more conservative after World War II, during the 1970's economists who were active during the Depression tended to give me a much more sympathetic hearing, even if they had drifted considerably to the right.

                            Today, the makeup of the economics profession has changed dramatically. The economists who experienced the Great Depression are gone. On virtually any campus, the economics department will be among the most conservative. Dissenting views are rarely tolerated, except in liberal arts colleges. Catholic colleges also tend to be less fearful of unorthodox views.

                            However, the government's stimulus plans - under both Bush and Obama - have been so inept that a good number of very conservative economists have been highly critical in ways that do not entirely differ from my own.

                            Perhaps what is most surprising is how little influence economists have had in the policy realm. Virtually no Congressional hearings have called upon economists, whether they are conventional or radical. How much influence economists - other than Larry Summers - have had behind closed doors is an open question. ...

                              Posted by on Tuesday, July 7, 2009 at 07:47 PM in Economics | Permalink  TrackBack (0)  Comments (40) 


                              What Caused the Housing Bubble?

                              Ed Glaeser says that if people were as smart as he is, they would have realized housing price increases were unsustainable and there wouldn't have been a housing bubble:

                              In Housing, Even Hindsight Isn’t 20-20, by Edward L. Glaeser: ...[Is] the housing market ... starting to hit bottom? ... One major point of economics is that predicting asset prices is extremely hard... Moreover, the last seven years should make everyone wary about predicting housing price changes. ...

                              The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations. Over a four-year period — from February 2002 to February 2006 — the Case-Shiller index increased ... about 50 percent in constant dollars.

                              Certainly, those price increases cannot be explained by increases in average income. Income growth was quite modest from 2002 to 2006. Nor can the boom be explained by a dearth of new housing supply. Construction rose dramatically during the boom...

                              A number of pundits place the blame for the bubble on ... Alan Greenspan. They argue that loose monetary policy caused housing prices to rise. While lower interest rates are correlated with higher prices, the relationship is far too weak to explain the price explosion that America experienced. ... To get a 50 percent real increase in housing prices, real interest rates would have had to decline by more than ...10 percentage points..., which is not what happened. ... Real rates actually rose slightly between 2002 and 2006.

                              While low interest rates, on their own, cannot make sense of the bubble, perhaps the increased availability of credit to subprime borrowers has more explanatory power. ... Yet the correlation between housing price growth and subprime lending across markets is as likely to indicate that lenders took more risks in booming markets as that those risks caused markets to boom. ...

                              The most plausible explanations of the bubble require levels of irrationality that are difficult for economists either to accept or explain.

                              For many years, the creators of the housing index, Chip Case and Robert Shiller, have argued that housing bubbles were fueled by irrationally optimistic beliefs about future housing price appreciation. More recently, Monika Piazzesi and Martin Schneider have documented the rise in optimistic beliefs about housing price appreciation over the recent boom. Using some elegant algebra, they suggest that overly optimistic beliefs could cause a boom even if those beliefs were held by only a small share of the population.

                              It is hard to argue with this view. The only way that anyone could justify spending bubble-level prices in Las Vegas was by having the incorrect belief that those prices would increase.

                              I once thought that the Las Vegas housing market was so straightforward (vast amounts of land, no significant regulation) that no one could be deluded into thinking that prices could long diverge from construction costs, but I was wrong. I underestimated the human capacity to think rosy thoughts about the value of a house.

                              Yet even if ridiculously rosy beliefs are a major part of bubbles, we cannot say that we understand those bubbles until we understand the sources of such beliefs. Economists like to link beliefs to reality, but these views weren’t grounded in sound statistics. The housing boom was a great wildfire that spread from market to market, but it is hard to make sense of its flames. ...

                              I don't think people believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time - that housing was a good long-run investment. They knew there would be variation around that trend, but they expected the variation to be relatively mild, they didn't expect the severe variation in prices and associated problems that actually occurred.

                              But as Shiller argues, the belief that real housing prices rise over time is false, the evidence suggests that real housing prices are relatively flat over the long-run. Because people expected prices to rise on average when they should have expected them to remain flat, the correction - the variation in prices - was far larger than anticipated and many homeowners weren't able to simply ride out the short-run variation like they thought they would be able to do.

                              But this still leaves a question unanswered. Why did people have this false belief about the long-run trajectory of prices? Shiller explains that this happened because people believed that both land and building materials were becoming relatively more scarce over time, a belief he says is false, but that just pushes the "but why did they believe that" question back one step from housing prices to the prices of land and raw materials.

                              So let me take a quick stab at an explanation (I'm not pushing this, it's just a quick thought). People are told (or were at that time) that stock markets are a great long-run investment. If you have the time to ride out the short-run fluctuations you can earn 8% per year. Just dump your money in an index fund that duplicates the market portfolio, and forget about it until many, many years later and you will do fine. Risk adjusted real returns on assets ought to equalize across markets through arbitrage, so shouldn't housing yield a real return similar to stocks (adjusting for risk)? Shouldn't there be a real return on housing just like in stock and other asset markets, and if so, doesn't that mean real prices will rise on average over time? This still requires beliefs about long-run prices at odds with (Shiller's) evidence though.

                              One more note. I may be wrong to assert that people thought that housing prices would rise forever. If you know that there is a bubble in an asset market, but you believe you can sell fast enough once the market hits a turning point to still make a profit, or at least not lose much in any case, then you may be willing to make an investment that tries to exploit the short-term surge in prices. But while I think that may apply to stock markets, or other markets where assets can be sold quickly (the belief that is, the reality is quite different when everybody tries to sell at once), I'm not sure this applies to housing where sales can be notoriously slow. But it's still possible that people would know there is a bubble in housing prices, but still be willing to make an investment because they believe that housing prices would fall so slowly that, if necessary, they could sell their house before taking a loss. It just doesn't seem to me that this explanation works as well in housing as it does in stock markets.

                                Posted by on Tuesday, July 7, 2009 at 11:29 AM in Economics, Financial System, Housing | Permalink  TrackBack (0)  Comments (71) 


                                France is "Remarkably Effective at Deploying Funds Quickly"

                                The "cheese-eating surrender monkeys" say that when it comes to stimulus programs, “The country that is behind is the U.S., not France.”:

                                France, Unlike U.S., Is Deep Into Stimulus Projects, by Nelson D. Schwartz, NY Times: French workers normally take off much of the summer, but this month,... throngs of tourists will be jostling alongside stonemasons, restoration experts and other artisans paid by the French government’s $37 billion economic stimulus program.

                                Their job? Maintain in pristine condition the 800-year-old palace of more than 1,500 rooms where Napoleon bid adieu before being exiled to Elba and where Marie Antoinette enjoyed a gilded boudoir.

                                Besides Fontainebleau, about 50 French chateaus are to receive a facelift, including the palace of Versailles. Also receiving funds are some 75 cathedrals like Notre Dame in Paris. A museum devoted to Lalique glass is being created in Strasbourg, while Marseilles is to be the home of a new 10 million euro center for Mediterranean culture.

                                All told, Paris has set aside 100 million euros in stimulus funds earmarked for what the French like to call their cultural patrimony. It is a French twist on how to overcome the global downturn, spending borrowed money avidly to beautify the nation even as it also races ahead of the United States in more classic Keynesian ways: fixing potholes, upgrading railroads and pursuing other “shovel ready” projects.

                                “America is six months behind; it has wasted a lot of time,” said Patrick Devedjian, the minister in charge of the French relance, or stimulus. By the time Washington gets around to doling out most of its money, Mr. Devedjian sniffed, “the crisis could be over.” ...

                                As it turns out, France’s more centralized, state-directed economy ... is proving remarkably effective at deploying funds quickly and efficiently in bad times. ...

                                It is easier to find money for castles and cathedrals, of course, in a country that believes “art is equal to other investments, not secondary,” as Mr. Devedjian puts it. But the largess is driven as well by President Sarkozy’s support for more spending to combat the recession, even if it means borrowing more and running up big deficits.

                                That contrasts sharply with the commitment by the German chancellor, Angela Merkel, to hold down stimulus spending and move as quickly as possible to curb her government’s budget deficit.

                                So what about the criticism that Europe is not being as aggressive as the United States in combating the global slowdown, with only tepid stimulus packages? That’s not the way the French see it.

                                “You lost time with changing a president and no decisions were made in the last three months of 2008,” Mr. Devedjian jibed. “Nothing happened in January 2009, and in February, there was just a speech.”

                                “The country that is behind is the U.S.,” he said, “not France.”

                                While the scale, $37 billion versus close to $800 billion, is a bit different and probably ought to be accounted for in the comparison, there does seem to be a difference not just in the speed of deployment, but also in the focus of the policy. It will be interesting to see how that difference, which seems to place somewhat more emphasis on boosting employment and aggregate demand immediately than on long-run growth in France as compared to the U.S., translates into a differential response to the fiscal policy boosts in the two countries.

                                  Posted by on Tuesday, July 7, 2009 at 01:15 AM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (53) 


                                  "U.S. Revives Section 2 of the Antitrust Act"

                                  Since I've argued that the enforcement of antitrust law hasn't been strict enough many times in the past -- "the idea that markets 'self-police'" anti-competitive behavior always seemed much more of a hope than a reality in my view of the evidence -- to me this is good news (but it's not good news to everyone). It's not just the textbook economic effects of monopoly power that are worrisome, it's also the ability of large and powerful firms to tilt regulation and legislation in their favor:

                                  Sherman Stirs: U.S. Revives Section 2 of the Antitrust Act, by Ashby Jones. WSJ: For nearly 120 years, the Sherman Antitrust Act has been the main vehicle through which the government and private parties have regulated the so-called anticompetitive behavior of corporate America.

                                  The act's two main sections target vastly different types of behavior, though each may result in both civil liability and criminal punishment.

                                  Section 1 largely addresses situations involving anticompetitive behavior of two or more entities working in concert. Cases involving price-fixing and market-division arrangements are typically brought under Section 1.

                                  Section 2 cases typically involve the behavior of one firm, acting alone. Section 2 cases generally require a private party or the government -- either the Department of Justice or the Federal Trade Commission -- to show that a firm with a significant market share has done something anticompetitive in order to increase or maintain its monopoly. Monopolies, without evidence of anticompetitve behavior, aren't necessarily illegal.

                                  While Section 1 cases are fairly common, the bulk of the headline-grabbing antitrust cases have been under Section 2... John D. Rockefeller's Standard Oil Co. ... AT&T... Microsoft ...

                                  Enforcement of Section 2 went largely dormant under President George W. Bush. Toward the end of his second term, the administration issued a report which codified its views on Section 2. It took the position that the marketplace, not government regulators or courts, provides the ideal check on anticompetitive business practices.

                                  In May, Christine Varney, President Barack Obama's pick to run the Justice Department's antitrust division, repudiated the Bush administration report, squarely placing some blame for the country's economic problems on the Bush administration's laissez-faire regulatory policies.

                                  "Americans have seen firms given room to run with the idea that markets 'self-police' and that enforcement authorities should wait for the markets to 'self-correct,' " Ms. Varney said at the time. "Ineffective government regulation, ill-considered deregulatory measures and inadequate antitrust oversight contributed to the current conditions ... we cannot sit on the sidelines any longer."

                                  Antitrust experts weren't surprised by Monday's news that with an initial review of conduct by large U.S. telecom companies [such as AT&T and Verizon], the Justice Department had started dusting off Section 2. ..

                                    Posted by on Tuesday, July 7, 2009 at 01:11 AM in Economics, Market Failure, Regulation | Permalink  TrackBack (0)  Comments (24) 


                                    links for 2009-07-07

                                      Posted by on Tuesday, July 7, 2009 at 12:02 AM in Environment, Links | Permalink  TrackBack (0)  Comments (25) 


                                      Monday, July 06, 2009

                                      "Half of the World's Emissions Came from Just 700 Million People"

                                      I'm on the run at the moment and have only given this a quick scan, hopefully the comments can take it up in more detail, but here is, according to the hype, the solution to all our global warming problems [Scientific American comments on the proposal here.]:

                                      New Princeton method may help allocate carbon emissions responsibility among nations, EurekAlert: Just months before world leaders are scheduled to meet to devise a new international treaty on climate change, a research team led by Princeton University scientists has developed a new way of dividing responsibility for carbon emissions among countries.

                                      The approach is so fair, according to its creators, that they are hoping it will win the support of both developed and developing nations, whose leaders have been at odds for years over perceived inequalities in previous proposals.

                                      The method is outlined in a paper, titled "Sharing Global CO2 Emissions Among 1 Billion High Emitters," published online in this week's Proceedings of the National Academy of Sciences. According to the authors, the approach uses a new fairness principle based on the "common but differentiated responsibilities" of individuals, rather than nations.

                                      "Our proposal moves beyond per capita considerations to identify the world's high-emitting individuals, who are present in all countries," the team says in the introduction. The authors include Stephen Pacala ... and Robert Socolow... Pacala and Socolow's concept of "stabilization wedges," a strategy that proposed concrete ways to prevent global emissions of greenhouse gases from rising for the next five decades, was featured in "An Inconvenient Truth," former Vice President Al Gore's 2006 film about climate change. The concept has given the climate change policy community a common unit for discussing how to reduce emissions and for allowing a comparison of different carbon-cutting strategies.

                                      Continue reading ""Half of the World's Emissions Came from Just 700 Million People"" »

                                        Posted by on Monday, July 6, 2009 at 03:30 PM in Economics, Environment, Policy | Permalink  TrackBack (0)  Comments (54) 


                                        Taking Complete Leave of their Senses

                                        Some examples of economists who "write a piece for public consumption," and in doing so, seem to "take complete leave of [their] senses":

                                        Example 1:

                                        Missing the Point on High-Speed Rail, by Ryan Avent: Ed Glaeser is a fantastic economist. He has done magnificent work analyzing the economics of urban growth and written indispensable papers on the connection between housing regulations and migration.

                                        But when the man picks up his pen to write a piece for public consumption, he tends to take complete leave of his senses. I realize that this is a common affliction among economists, but Glaeser suffers from a severe case of the syndrome.

                                        In a Friday piece in the Boston Globe, Glaeser takes on the administration's push to fund construction of high-speed rail corridors around the country. In doing so, he combines the cognitive failures of every amateur train hater with a serious lapse in critical thinking. ...

                                        Example 2:

                                        Administrative Costs, by Paul Krugman: Whenever you encounter “research” from the Heritage Foundation, you always have to bear in mind that Heritage isn’t really a think tank; it’s a propaganda shop. Everything it says is automatically suspect.

                                        Greg Mankiw forgets this rule, and approvingly (yes, it’s obvious he approves -no wiggling out) links to a recent Heritage attempt to explain away Medicare’s low administrative costs...

                                        Well, whaddya know — this is an old argument, and has been thoroughly refuted. ...

                                        You should always remember:

                                        1. Don’t believe anything Heritage says.

                                        2. If you find what Heritage is saying plausible, remember rule 1.

                                        [Note: Krugman follow up here.]

                                        Continuing with Example 2, Andrew Gelman can't understand why Greg Mankiw quotes the Heritage Foundation instead of someone from "Harvard's world-class Department of Heath Care Policy" with the authority and credibility to speak on these issues (hence the "Eagle Scout" reference):

                                        Does Medicare actually have higher administrative costs than private insurers?, by Andrew Gelman: Greg Mankiw links to an article that illustrates the challenges of interpreting raw numbers causally. This would really be a great example for your introductory statistics or economics classes, because the article, by Robert Book, starts off by identifying a statistical error and then goes on to make a nearly identical error of its own! ...

                                        I'm no expert in health policy. These are just my impressions as a teacher of statistics. It's great to find such examples that are so relevant to policy. I was surprised to see Mankiw quote the above article without criticism; but I'm pretty sure he's studied these issues in a lot more detail than I have, and so perhaps he has additional knowledge that makes him confident in the substance of Book's reasoning.

                                        In particular, I expect that Mankiw has spent some time talking with the faculty at Harvard's world-class Department of Heath Care Policy. I don't know if any of their professors are Eagle Scouts, but they do have this guy, who was the founding editor of the Journal of Health Economics, a member of the editorial board of the New England Journal of Medicine, vice chair of the Medicare Payment Advisory Commission, etc etc. Also on the board of directors of Aetna so it looks like he has experience on both sides. Perhaps Newhouse or one of his colleagues has done a more detailed study that support's Book's conclusions.

                                          Posted by on Monday, July 6, 2009 at 01:25 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (20) 


                                          Paul Krugman: HELP Is on the Way

                                          We can afford health care reform:

                                          HELP Is on the Way, by Paul Krugman, Commentary, NY Times: The Congressional Budget Office has looked at the future of American health insurance, and it works.

                                          A few weeks ago there was a furor when the budget office “scored” two incomplete Senate health reform proposals — that is, estimated their costs and likely impacts over the next 10 years. One proposal came in more expensive than expected; the other didn’t cover enough people. Health reform, it seemed, was in trouble.

                                          But last week the budget office scored the full proposed legislation from the Senate committee on Health, Education, Labor and Pensions (HELP). And the news — which got far less play in the media than the downbeat earlier analysis — was very, very good. Yes, we can reform health care. ...

                                          [A] look at the U.S. numbers makes it clear that insuring the uninsured shouldn’t cost all that much, for two reasons.

                                          Continue reading "Paul Krugman: HELP Is on the Way" »

                                            Posted by on Monday, July 6, 2009 at 12:15 AM in Economics, Health Care, Policy, Politics | Permalink  TrackBack (0)  Comments (46) 


                                            "The Perpendicular"

                                            I'm not sure how to introduce this, other than to say thank you to David Warsh of Economic Principals. This is the introduction to a much longer article on econoblogging:

                                            The Perpendicular, by David Warsh: The morning that I visited him last week, Mark Thoma had fielded back-to-back calls first thing from Reuters and Bloomberg. The day before, The Wall Street Journal had sought to arrange for a photograph; the day after, N. Gregory Mankiw, of Harvard University, proudly pointed on his blog to a Thoma item about a speech that Mankiw had made some years before, as former adviser to George W. Bush. Paul Krugman, of The New York Times and Princeton University, had done as much the week before. No wonder, then, that during a recent meet-and-greet, the president of Thoma’s university, upon discovering himself to be shaking hands with the proprietor of Economist’s View, made a fuss and introduced the self-effacing professor to the assembled throng.

                                            Not too shabby, considering that we were lunching in the leafy little city of Eugene, where the 52-year-old Thoma teaches at the University of Oregon. The WSJ last week was preparing to include Thoma in an article about the most popular economic bloggers. Earlier in the year he had been an invited guest at Kauffman Foundation and Milken Institute conferences. How did Thoma achieve a position of influence three times zones and a world away from the financial and political capitals back East?

                                            The first part of the answer is, of course, the Internet. Thoma is an economic blogger of an unusual sort – a mostly disinterested editor and re-publisher of a selection of items from the daily torrent of informed opinion available on the Web.  There are many other highly-rated economic bloggers:  Tyler Cowen and Alex Tabarrok, of George Mason University, conduct a peripatetic patrol at Marginal Revolution; J. Bradford Delong, of the University of California at Berkeley, dispenses caustic wit and insight at Grasping Reality with Both Hands; Stephen Levitt, of the University of Chicago, and Steven Dubner and friends hold forth at  Freakonomics; Yves Smith (a clever nom de net for a former lady banker) writes on Naked Capitalism from Wall Street; Dani Rodrik’s Weblog dispenses common sense on development economics; Baseline Scenario badgers governments with an above-the-fray sensibility rather like that of the International Monetary Fund. Krugman and Mankiw on their blogs are talking heads much more timely and topical, and only a little more gray, than when they began taking turns with one another at two-week intervals at Fortune magazine fifteen years ago. The ranking of these and other bloggers is continually appraised by the powerful collaborative filtering mechanism that is the heart of the custom of exchanging links. ... [...continue reading...] ...

                                              Posted by on Monday, July 6, 2009 at 12:06 AM in Economics, Weblogs | Permalink  TrackBack (0)  Comments (33) 


                                              links for 2009-07-06

                                                Posted by on Monday, July 6, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (13) 


                                                Sunday, July 05, 2009

                                                Another Boost for the Economy?

                                                Paul Krugman wonders what the vice president is thinking:

                                                What didn’t the vice president know?, by Paul Krugman: And when did he not know it?

                                                Seriously, the economy isn’t doing all that much worse than a number of people warned was probable. And the whole political economy thing was, sadly, predictable:

                                                This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

                                                I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

                                                Let’s hope I’ve got this wrong.

                                                Apparently I didn’t.

                                                But never mind the hoocoodanodes and ayatollahyaseaux. What’s important now is that we don’t compound the understimulus mistake by adopting what Biden seems to be proposing — namely, a wait and see approach. Fiscal stimulus takes time. If we wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good before late 2010 or beyond.

                                                Brad DeLong:

                                                Joe Biden Misses the Point..., by Brad DeLong: If the Obama fiscal boost program has its anticipated impact on the economy as its main effects take hold over the next year, it is still half the size of the program it now looks like we need. Only if it magically turns out to be twice as strong as we think--only with simple Keynesian multipliers of 3 rather than 1.5--is it the right size.

                                                And, of course, if the situation deteriorates further we will need an even bigger stimulus, while if the situation improves having too-big a stimulus is not a problem because we can soak up the demand through monetary policy.

                                                So Vice President Joe Biden completely misses the point when he says:

                                                I think it's premature to make that judgment [that we need a larger stimulus]. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid -- the new electric grid. And so this is just starting, the pace of the ball is now going to increase.

                                                Of course, he is paid to miss the point. Which is one reason why being Vice President is a really lousy job.

                                                Sam Stein reports:

                                                Biden Ignores Warnings Of Krugman, Stiglitz, Roubini And Others: During his interview with ABC's This Week on Sunday, Vice President Joe Biden made what will be a much-discussed admission in the week ahead. The Obama administration, he said, had "misread" the extent of the economic catastrophe it inherited. "The truth is, we and everyone else misread the economy," declared Biden. "The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there. We misread how bad the economy was, but we are now only about 120 days into the recovery package," the vice president said later in the interview. "The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money."

                                                Certainly, the Obama administration's acknowledgment that it misjudged the crisis it inherited is rife with possibilities for its political opponents. ...

                                                But equally problematic is Biden's assertion that "everyone" - not just the White House - was off in their prognostications. This is simply untrue. Host George Stephanopoulos pointed out that "a lot of people were saying that you needed to do something bigger and bolder" when it came to the stimulus package. He named New York Times columnist Paul Krugman as one example. There are many others. The prize-winning Columbia University economist Joseph Stiglitz not only warned that the stimulus was too small during its construction, the day after Obama signed it into law he predicted how its shortcomings would make themselves apparent. ... Stiglitz was joined by a whole host of liberal economists -- from the University of Texas' James Galbraith to Dean Baker of the Center for Economic and Policy Research -- who warned that the stimulus package inexplicably underestimated the size of the crisis.

                                                Several weeks after the stimulus passed, economist Nouriel Roubini, known affectionately as Dr. Doom, made the case that the administration's approach to stabilizing the economy lacked an effective international component. ...

                                                The day that June's job numbers came out, meanwhile, Nassim Taleb, principal of Universa Investments and author of 'The Black Swan,' offered a far more grim interpretation of what was transpiring, though one relatively consistent with what he had said in the past. "We're in the middle of a crash," said Taleb during an appearance on CNBC. "So if I'm going to forecast something, it is that it's going to get worse, not better." ...

                                                To be fair, the process of economic forecasting is, as Taleb noted in his CNBC segment, an inherently tricky proposition. In October 2008, for instance, Roubini was arguing that the government needed a $400 billion stimulus package, which ended up being just more than half of what the Obama White House settled on.

                                                But among those who were sounding the loudest alarms about the potential inadequacies of the economic recovery plan, the consensus seems to be emerging that more now needs to be done. Later in his ABC segment, Biden - who is responsible for overseeing the stimulus - was asked if a second package was in the offing. No, he replied, without dismissing the possibility outright. "I think it's premature to make that judgment. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid -- the new electric grid. And so this is just starting, the pace of the ball is now going to increase."

                                                That pretty much covers it, so I will just add that all of this also applies to Bruce Bartlett's commentary today in the Financial Times:

                                                We do not need a second stimulus plan, by Bruce Bartlett, Commentary, Financial Times: As the US unemployment rate has risen to 9.5 per cent from 8.1 per cent since the $787bn fiscal stimulus package was enacted in February, many Democrats have become very nervous. They say that another large stimulus may be needed to keep unemployment from rising well beyond the 10 per cent rate that President Barack Obama has predicted will be reached this year.

                                                Another stimulus would be a grave mistake. The first one was justified by extraordinary circumstances. But it must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future.

                                                The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately. ...

                                                As for inflation fears, see here for one of the many arguments that have appeared here explaining why those fears are overblown. And, on the claim about the administration's forecast, back to Brad DeLong:

                                                The quotes from the Hon. Christina D. Romer are:

                                                • We do not want to repeat the mistake Japan made in the 1990s, when the moment things started to improve they tightened policy...

                                                • [Stimulus spending is] going to ramp up strongly through the summer and the fall. We always knew we were not going to get all that much fiscal impact during the first five to six months. The big impact starts to hit from about now onwards...

                                                • [Stimulus spending] should make a material contribution to growth in the third quarter...

                                                • I am more optimistic that we are getting close to the bottom...

                                                • I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario, but it is not as unlikely as many people think. We are going to get some serious oomph from the stimulus, there is the inventory cycle, and I believe there is some pent-up demand by consumers...

                                                As Krugman says above, and as I stressed in a recent interview, if we "wait to see whether round one did the trick, round two won’t have much chance of doing a lot of good." Here's what I said in April in response to talk of green shoots:

                                                ...I don’t think we’ve reached the beginning of the end, and caution is in order, particularly for policymakers. It is not at all unusual for the economy to tick upward temporarily during a slowdown, only to have it return to its previous, stagnating state. So policymakers must consider the possibility that this is nothing more than a temporary blip in the data, and continue to plan and set the stage for further action, if necessary.

                                                Did they start setting the stage? Not as far as I can tell.

                                                Update: Paul Krugman:

                                                Bruce Bartlett misstates the problem, by Paul Krugman: He says:

                                                The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately.

                                                Um, that’s totally false. Did Bartlett even look at the Bernstein-Romer paper? Here’s the key graph [link to graph]... We’re now at the very beginning of 2009Q3; they predicted that the unemployment rate right now would be only a fraction of a percent lower now than it would otherwise be. The impact wasn’t supposed to be really noticeable until late this year, and wasn’t supposed to peak until late 2010.

                                                The problem, in other words, is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon. The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted. That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.

                                                Bruce Bartlett, in comments:

                                                The chart clearly shows the unemployment lines diverging in the second quarter, suggesting that the stimulus was expected to impact on the economy within two months of enactment. That's a pretty damn fast effect. And needless to say, we haven't seen any impact of the stimulus on unemployment yet. So I don't understand what Paul is disagreeing with me about when I say that the administration was too optimistic. It seems self-evident that it was.

                                                  Posted by on Sunday, July 5, 2009 at 02:07 PM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (41) 


                                                  "The Next Great Global Industry"

                                                  Thomas Friedman says the race to develop clean-power technologies is on, and if we lose it we won't be able to afford health care reform:

                                                  Can I Clean Your Clock?, by Thomas Friedman, Commentary, NY Times: Over the past decade, whenever I went to China and engaged Chinese on their pollution and energy problems, inevitably some young Chinese would say: “Hey, you Americans got to grow dirty for 150 years, using cheap coal and oil. Now it is our turn.”

                                                  It’s a hard argument to refute. Eventually, I decided that the only way to respond was...: “You’re right. It’s your turn. Grow as dirty as you want. Take your time. Because I think America just needs five years to invent all the  you Chinese are going to need as you choke to death on pollution. Then we’re going to come over here and sell them all to you, and we are going to clean your clock ... in the next great global industry: clean power technologies...”

                                                  Whenever you frame it that way, Chinese are quizzical at first, and then they totally get it:... E.T. — energy technologies that produce clean power and energy efficiency — is going to be the next great global industry, and China needs to be on board. Well, China has gotten on board — big-time. Now I am worried that China will, dare I say, “clean our clock” in E.T.

                                                  Yes, you might think that China is only interested in polluting its way to prosperity. That was once true, but it isn’t anymore. China is increasingly finding that it has to go green out of necessity because in too many places, its people can’t breathe, fish, swim, drive or even see because of pollution and climate change. Well, there is one thing we know about necessity: it is the mother of invention.

                                                  And that is what China is doing, innovating more and more energy efficiency and clean power systems. And when China starts to do that in a big way — when it starts to develop solar, wind, batteries, nuclear and energy efficiency technologies on its low-cost platform — watch out. ...

                                                  “China is moving,” says Hal Harvey, the chief executive of ClimateWorks, which shares clean energy ideas around the world. “...Sustainable technologies in solar, wind, electric vehicles, nuclear and other innovations will drive the future global economy. We can either invest in policies to build U.S. leadership in these new industries and jobs today, or we can continue with business as usual and buy windmills from Europe, batteries from Japan and solar panels from Asia.” ...

                                                  This is a major reason I favor the climate/energy bill passed by the House. If we do not impose on ourselves the necessity to drive innovation in clean-technology ... we will be laggards in the next great global industry.

                                                  And this is why I disagree with President Obama when he signals that he has to focus on extending health care and put the energy/climate bill — now in the Senate — on the backburner.

                                                  Health care and the energy/climate bill go together. We need both now. Imagine how poor we would be today if U.S. firms did not dominate the top 10 Internet companies. Well, if we don’t dominate the top 10 E.T. rankings, there is no way we are going to be able to afford decent health care for every American. No way.

                                                  I don't want to underplay the necessity of developing technology that will help to reduce greenhouse gases, and competition between countries and between firms ought to help with that development, but is that true? Is domination of the E.T industry the only way we can afford "decent health care for every American"? Other countries manage to provide decent health care for every one of their citizens, and they don't seem to need to dominate the major industries in the world to do it.

                                                    Posted by on Sunday, July 5, 2009 at 01:56 AM in Economics, Environment, Health Care | Permalink  TrackBack (0)  Comments (46) 


                                                    links for 2009-07-05

                                                      Posted by on Sunday, July 5, 2009 at 12:01 AM in Economics, Links | Permalink  TrackBack (0)  Comments (7) 


                                                      Saturday, July 04, 2009

                                                      Created Equal

                                                      William Easterly:

                                                      Fourth of July Edition, Aid Watch:

                                                      We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

                                                      What a turning point in history this statement was on the first Fourth of July 233 years ago. Yet this bold ideal was proclaimed long in advance of any practical chance of fulfillment. The author of these words was an owner of African slaves. Nobody at the time worried whether “men” was a generic term that also included “women.” Nor did anyone give any thought to whether it applied to people known at the time by words like “barbarians” and “savages.” Yet it worked pragmatically in the long run as an ideal that reformers could appeal to again and again.

                                                      So 87 years later, another eloquent writer and speaker could appeal to these words to fight for the end of slavery in the United States:

                                                      Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal. Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure.

                                                      And slavery did indeed end, yet legal equality for African-Americans did not arrive. So 100 years later, another great American would say:

                                                      I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident: that all men are created equal."

                                                      And thanks to the efforts of the civil rights movement he led, African-Americans achieved legal equality.

                                                      “Created equal” is a principle yet to be accepted in most of the world, which perhaps has a lot to do with why most of the world is still not developed. Inequality of rights between elites and majorities, between ethnic and religious groups, between men and women is pervasive. But perhaps we can hope that this ideal still serves as a beacon that crusaders continue to cite in their ongoing struggle for the dignity and rights of every man and woman.

                                                        Posted by on Saturday, July 4, 2009 at 08:56 AM in Economics | Permalink  TrackBack (0)  Comments (29) 


                                                        Climate Change Legislation and Protectionism

                                                        Martin Feldstein opposes border adjustments related to cap-and-trade:

                                                        Will Cap-and-Trade Incite Protectionism?, by Martin Feldstein, Commentary, Project Syndicate: There is a serious danger that the international adoption of cap-and-trade legislation to limit carbon-dioxide emissions will trigger a new round of protectionist measures. ... 150 countries are scheduled to meet in Copenhagen in December to discuss ways to reduce CO2 emissions.

                                                        Governments have ... focused on a cap-and-trade system as a way of increasing the cost of CO2-intensive products... The cap-and-trade system ... imposes a carbon tax without having to admit that it is really a tax.

                                                        A cap-and-trade system can cause serious risks to international trade. Even if every country has a cap-and-trade system and all aim at the same relative reduction in national CO2 emissions, the resulting permit prices will differ because of national differences in initial CO2 levels and in domestic production characteristics. Because the price of the CO2 permits in a country is reflected in the prices of its products, the cap-and-trade system affects its international competitiveness.

                                                        When the permit prices become large enough to have a significant effect on CO2 emissions, there will be political pressure to introduce tariffs on imports that offset the advantage of countries with low permit prices. Such offsetting tariffs would have to differ among products ... and among countries (being higher for countries with low permit prices). Such a system of complex differential tariffs is just the kind of protectionism that governments have been working to eliminate since the start of the GATT process more than 50 years ago.

                                                        Worse still, cap-and-trade systems in practice do not rely solely on auctions to distribute the emissions permits. ... Such complexities make it impossible to compare the impact of CO2 policies among countries, which in turn would invite those who want to protect domestic jobs to argue for higher tariff levels.

                                                        There is no easy answer to this problem. But before rushing to impose tariffs, it is important to remember that cap-and-trade policies would not be the only government source of differences in competitiveness. Better roads, ports, and even schools all contribute to a country’s competitiveness. No one attempts to use tariffs to balance those government-created differences in competitiveness, and there should be no such attempts if a cap-and-trade system is introduced.

                                                        If an international agreement to impose a cap-and-trade scheme is adopted in Copenhagen, the countries there should agree as well that there will be no attempt to introduce offsetting tariffs that would ultimately threaten our global system of free trade.

                                                        Paul Krugman on what to do if other countries refuse to participate:

                                                        Climate, trade, Obama, by Paul Krugman: I think the president has this wrong:

                                                        President Obama on Sunday praised the energy bill passed by the House late last week as an “extraordinary first step,” but he spoke out against a provision that would impose trade penalties on countries that do not accept limits on global warming pollution. ...

                                                        The truth is that there’s perfectly sound economics behind border adjustments related to cap-and-trade. The way to think about it is in terms of a well-established theory — the theory of non-economic objectives in trade policy — that owes its origins to Jagdish Bhagwati, who certainly can’t be accused of being a protectionist. The essential idea is that if you have a non-economic objective, such as self-sufficiency in food production, you should choose policy instruments to align incentives with that objective; in normal circumstances this leads to consumer or producer intervention, rarely to tariffs.

                                                        But in this case the non-economic objective is to reduce greenhouse gas emissions, never mind their source. If you only impose restrictions on greenhouse gas emissions from domestic sources, you give consumers no incentive to avoid purchasing products that cause emissions in other countries; as a result, you have an inefficient outcome even from a world point of view. So border adjustments here are entirely legitimate in terms of basic economics.

                                                        And they’re also probably OK under trade law. The WTO has looked at the issue, and suggests that carbon tariffs may be viewed the same way as border adjustments associated with value-added taxes. ... Because it’s essentially a tax on consumers, it’s legal, and also economically efficient, to collect it on imported goods as well as domestic production; it’s a matter of leveling the playing field, not protectionism.

                                                        And the same would be true of carbon tariffs.

                                                        What’s happening here, I think, is that people are relying on what Paul Samuelson called an economic “shibboleth” — they’re relying on some slogan rather than thinking through the underlying economics. In this case the shibboleth is “free trade good, protection bad”, when what the economics really says is that incentives should reflect the marginal cost of greenhouse gases in all goods, wherever produced — which in this case happens to imply border adjustments.

                                                        ___________________________________________________________

                                                        Update: On the effects of climate change legislation, this is from a July 4 post at the CBO Director's blog:

                                                        Estimated U.S. Emissions under the House-passed Bill

                                                        Emissions

                                                          Posted by on Saturday, July 4, 2009 at 12:17 AM in Economics, Environment, Regulation | Permalink  TrackBack (0)  Comments (15) 


                                                          links for 2009-07-04

                                                            Posted by on Saturday, July 4, 2009 at 12:06 AM in Economics, Links | Permalink  TrackBack (0)  Comments (3) 


                                                            Friday, July 03, 2009

                                                            Malthus "Would have been Very Much at Home in the Blogosphere"

                                                            In Thomas Malthus' time, there was a dispute over the corn laws (which were tariffs on imported grains imposed in the early 1800s). Landlords favored the corn laws, and though the landlords were the most powerful class at that time, they were coming under increasing attack from the rising merchant and industrial capital classes. Why the conflict?

                                                            The tariffs raised the price of corn, something the landlords favored, but since corn was a key component of the subsistence workers relied upon to survive, the price of labor - the wage rate - would reflect the price of corn. If the price of corn was high, wages would be high, and when the price of labor rises merchants and capitalists would have a more difficult time selling their goods profitably. The fear was compounded by the end of the Napoleonic wars and the threat of large imports of cheap grain from France.

                                                            So what was the effect of the corn laws on the price of corn, on wages, on the welfare of the poor, and so on? Finding an answer to this question, as well as the answer to what impact poor laws have, and what causes gluts (recessions) drove both Malthus and Ricardo to develop theoretical models that could guide them to the answer and hence to the correct policy prescription. Thus, their analytical contributions to economics were driven primarily by the important social questions of the time.

                                                            Here's more on Malthus:

                                                            Malthus blogging on the Corn Laws, by Daniel Little: I think that Thomas Malthus would have been very much at home in the blogosphere. He weighed in on the issues of the day, bringing careful logical analysis of economic theory to bear on the policy issues that were up for debate. And he was very interested in making the connection between economic principles and real empirical evidence. This is particularly true in his contributions to the debate on the Corn Laws in 1814 and 1815. Malthus authored pamphlets on these issues in 1814 ("Observations on the effects of the corn laws"; link) and 1815 ("Grounds of an opinion on the policy of restricting the importation of foreign corn"; link), and they repay scrutiny today; they are powerful instances of a very smart economist probing the theory and the facts surrounding a complex policy issue. (Here is a nice survey of Malthus's theories; link.)

                                                            The Corn Laws might be thought of as a form of "stimulus package" for the British economy in the early nineteenth century. By setting a high tariff on the import of wheat and other grains, Parliament aimed to protect the agricultural sector and to encourage the expansion of grain production to make Britain more independent from external grain providers. One might also compare the debate to the NAFTA debate or to policy deliberations in the 1960s concerning "import substitution" strategies. Opponents argued that removal of the tariffs would bring down the price of grain, a central component of the wage basket; this would help the poor and would also permit a significant reduction of the wage as well. So the issue divides the interests of land owners, industrialists, and the poor.

                                                            Malthus's position in the two essays is somewhat different. In the first article he promises to lay out the issue dispassionately, dispelling false opinions about what the effects of the proposed policy might be and diving into the advantages and disadvantages of the policy. He writes that "some important considerations have been neglected on both sides of the question, and the effects of the corn laws, and of a rise or fall in the price of corn, on the agriculture and general wealth of the state, have not yet been fully laid before the public." A bit further on, he writes:

                                                            My main object is to assist in affording the materials for a just and enlightened decision; and whatever that decision may be, to prevent disappointment, in the event of the effects of the measure not being such as were previously contemplated. Nothing would tend so powerfully to bring the general principles of political economy into disrepute, and to prevent their spreading, as their being supported upon any occasion by reasoning, which constant and unequivocal experience should afterwards prove to be fallacious.

                                                            So--"let's do rigorous and systematic analysis based on the principles of political economy and our best understanding of the facts." Good advice for a policy debate.

                                                            Quite a bit of the analysis is devoted to refuting an idea that Malthus attributes to Adam Smith ... [...continue reading...]

                                                              Posted by on Friday, July 3, 2009 at 04:21 PM in Economics, History of Thought | Permalink  TrackBack (0)  Comments (3) 


                                                              Does Lack of Insurance Distort the Market for Romance?


                                                              [Suggested by email]

                                                                Posted by on Friday, July 3, 2009 at 01:43 PM in Economics, Health Care, Video | Permalink  TrackBack (0)  Comments (7) 


                                                                Obama Economic Forecast

                                                                Spencer at Angry Bear:

                                                                The right is having a lot of fun commenting about the economic forecast by the Obama team being too optimistic. ... I guess they are right, Obama along with everyone else has massively underestimated the damage Team Bush did to our economy.

                                                                  Posted by on Friday, July 3, 2009 at 01:32 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (11) 


                                                                  Rationing Health Care

                                                                  Uwe Reinhardt:

                                                                  ‘Rationing’ Health Care: What Does It Mean?, by Uwe E. Reinhardt, Economix: As the dreaded R-word — rationing — once again worms its way into our debate on health care reform, it may be helpful to relearn what is taught about rationing in freshman economics.

                                                                  In their well-known textbook Microeconomics, the Harvard professor Michael L. Katz and the Princeton professor Harvey S. Rosen, for example, put it thusly:

                                                                  Prices ration scarce resources. If bread were free, a huge quantity of it would be demanded. Because the resources used to produce bread are scarce, the actual amount of bread has to be rationed among its potential users. Not everyone can have all the bread that they could possibly want. The bread must be rationed somehow; the price system accomplishes this in the following way: Everyone who is willing to pay the equilibrium price gets the good, and everyone who does not, does not. [Italics added.]

                                                                  In short, free markets are not an alternative to rationing. They are just one particular form of rationing. ...

                                                                  Many critics of the current health reform efforts would have us believe that only governments ration things.

                                                                  When a government insurance program refuses to pay for procedures that the managers of those insurance pools do not consider worth the taxpayer’s money, these critics immediately trot out the R-word. It is the core of their argument against cost-effectiveness analysis and a public health plan for the non-elderly.

                                                                  On the other hand, these same people believe that when, for similar reasons, a private health insurer refuses to pay for a particular procedure or has a price-tiered formulary for drugs – e.g., asking the insured to pay a 35 percent coinsurance rate on highly expensive biologic specialty drugs that effectively put that drug out of the patient’s reach — the insurer is not rationing health care. Instead, the insurer is merely allowing “consumers” (formerly “patients”) to use their discretion on how to use their own money. The insurers are said to be managing prudently and efficiently, forcing patients to trade off the benefits of health care against their other budget priorities. ...

                                                                  One must wonder where people worried about “rationing” health care have been in the last 20 years. Could they possibly be unaware that the United States health system has rationed health care in spades for many years, on the economist’s definition of rationing, and that President Obama and Congress are now desperately seeking to reduce or eliminate that form of rationing?

                                                                  Let me remind rationing-phobes what they would find in the huge body of research literature and media reports on our health system, should they ever trouble themselves to read it ...[list here]...

                                                                  As I read it, the main thrust of the health care reforms espoused by President Obama and his allies in Congress is first of all to reduce rationing on the basis of price and ability to pay in our health system.

                                                                  An important allied goal is to seek greater value for the dollar in health care, through comparative effectiveness analysis and payment reform. ...

                                                                  To suggest that the main goal of the health-reform efforts is to cram rationing down the throat of hapless, non-elite Americans reflects either woeful ignorance or of utter cynicism. Take your pick.

                                                                  I tired to make the same basic argument here: "Health Care Rationing Rhetoric".

                                                                  Bruce Bartlett:

                                                                  Health Care: Costs And Reform, by Bruce Bartlett, Commentary, Forbes: When asked about the federal government's long-term budget problem, Barack Obama always responds that it is essentially a health issue. Unless we fix the health care system, he says, we cannot get control of the budget. This is the key reason why Obama has stressed the need for health reform this year.

                                                                  There is certainly truth in this proposition. ... According to CBO, spending for Medicare has risen 2.3% per year faster per beneficiary than growth of nominal GDP per capita since 1975. Obviously, this is a trend that cannot be allowed to continue or Medicare will eventually eat up 100% of currently projected tax receipts.

                                                                  The problem of health care spending growing faster than incomes is also a problem that plagues the private sector, which explains why total spending on health care in the economy has doubled over the last 30 years to a current level of about 16% of GDP. CBO estimates that this percentage will double again over the next 25 years to 31% of GDP.

                                                                  Americans widely believe that while the our health system is expensive it is nevertheless the best in the world. However, a new report from the Organization for Economic Cooperation and Development suggests otherwise. ...

                                                                  Continue reading "Rationing Health Care" »

                                                                    Posted by on Friday, July 3, 2009 at 11:51 AM in Economics, Health Care | Permalink  TrackBack (0)  Comments (28) 


                                                                    Paul Krugman: That ’30s Show

                                                                    The economy needs more help:

                                                                    That ’30s Show, by Paul Krugman, Commentary, NY Times: O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that?...

                                                                    Since the recession began, the U.S. economy has lost 6 ½ million jobs — and as that grim employment report confirmed, it’s continuing to lose jobs at a rapid pace. Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8 ½ million jobs in the hole.

                                                                    And the ... job figures weren’t the only bad news in Thursday’s report, which also showed wages stalling and possibly on the verge of outright decline. That’s a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

                                                                    Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

                                                                    So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s ... not remotely enough. And there doesn’t seem to be much else going on. Do you remember the administration’s plan to sharply reduce the rate of foreclosures, or its plan to get the banks lending again by taking toxic assets off their balance sheets? Neither do I.

                                                                    All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. ... President Obama and his officials need to ramp up their efforts, starting with a plan to make the stimulus bigger. Just to be clear, I’m well aware of how difficult it will be to get such a plan enacted.

                                                                    There won’t be any cooperation from Republican leaders... Indeed, these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan. That’s ludicrous, of course. The administration warned from the beginning that it would be several quarters before the plan had any major positive effects. ...

                                                                    It’s also not clear whether the administration will get much help from Senate “centrists,” who partially eviscerated the original stimulus plan...

                                                                    And as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role.

                                                                    It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and ... grossly exaggerated claims about the evils of short-run budget deficits. ...

                                                                    Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.

                                                                    So getting another round of stimulus will be difficult. But it’s essential.

                                                                    Obama administration economists understand the stakes. Indeed, just a few weeks ago, Christina Romer, the chairwoman of the Council of Economic Advisers, published an article on the “lessons of 1937” — the year that F.D.R. gave in to the deficit and inflation hawks, with disastrous consequences...

                                                                    What I don’t know is whether the administration has faced up to the inadequacy of what it has done so far.

                                                                    So here’s my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don’t, you’ll soon be facing your own personal 1937.

                                                                      Posted by on Friday, July 3, 2009 at 01:03 AM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (78) 


                                                                      links for 2009-07-03

                                                                        Posted by on Friday, July 3, 2009 at 12:06 AM in Economics, Links | Permalink  TrackBack (0)  Comments (7) 


                                                                        links for 2009-07-03

                                                                          Posted by on Friday, July 3, 2009 at 12:04 AM in Economics | Permalink  TrackBack (0)  Comments (0) 


                                                                          Thursday, July 02, 2009

                                                                          Tom Keene's "On the Economy"

                                                                          From earlier today:

                                                                          Thoma Says Fiscal Policy Needs 6 to 9 Months to Take Effect
                                                                          July 2 (Bloomberg) -- Mark Thoma, professor of economics at the University of Oregon, talks with Bloomberg's Tom Keene about U.S. employment, consumer confidence and the fiscal stimulus. Listen/Download

                                                                          [Recent podcasts include: DeLong, Roubini, Eichengreen, Ritholtz, and Blinder.]

                                                                            Posted by on Thursday, July 2, 2009 at 04:53 PM in Economics, Media | Permalink  TrackBack (0)  Comments (3) 


                                                                            "Old Speeches, New Policies"

                                                                            Greg Mankiw responds to this post, "Deficits are Worrisome, but Not as Worrisome as an Economy that is ... Rapidly Shedding Jobs" (or maybe it was this):

                                                                            Old Speeches, New Policies, by Greg Mankiw: For academics, it always a delight when some old, obscure thing we've written suddenly gets noticed. So I was pleased when econoblogger Mark Thoma decided to draw attention yesterday to a speech I gave six years ago (pdf version) to the National Association of Business Economists. I had not looked at that speech in years, but looking back at it today, I think that it holds up pretty well. So, please, feel free to follow the link and read the whole thing.

                                                                            The part of the speech that Mark highlights on his blog is the defense of running budget deficits during a recession. I am a bit puzzled about why Mark picked up that piece, however. Mark seems to be suggesting that my speech can somehow be construed as a defense of Obama fiscal policy. Yet I don't think that aspect of current economic policy is controversial. As I wrote in the NY Times in March of this year, "Few economists would blame either the Bush administration or the Obama administration for running budget deficits during an economic downturn." ...

                                                                            The controversial part of current fiscal policy are, first, the relative reliance on spending hikes versus tax cuts as short-run stimulus and, second, the long-term picture. ...

                                                                            This speech was given in September 2003, just under two years after the end of the 2001 recession, but job growth remained sluggish. From the speech:

                                                                            Growth had resumed after the end of the recession in November 2001, but the pace of growth was far from satisfactory. And of course the labor market remained, and still remains, lagging behind.

                                                                            So what did they propose? As a follow-up to the "Administration’s tax cut in 2001 and the stimulus package of 2002," they proposed another stimulus package, and never mind the deficit:

                                                                            Because further policy action was clearly needed, the President pushed hard for the passage of his Jobs and Growth initiative. The purpose of this initiative was not only to help push the economy back toward its potential but also to raise this potential by improving supply-side incentives for work and investment.

                                                                            I'm sure the Obama administration will be pleased to know that, should this recovery be similarly jobless, or W-shpaed - if the recovery is listless or non-existent for any reason - that, rather than harping on the deficit and the potential problems it might cause, they can count on Greg Mankiw's support for another round of fiscal stimulus to try to turn things around. (And if a lot of the spending is on infrastructure, as it was this time, he should also be pleased with the long-run supply-side effects of these policies.)

                                                                              Posted by on Thursday, July 2, 2009 at 03:53 PM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (10) 


                                                                              The Consequences of External Reform: Lessons from the French Revolution

                                                                              Was Hayek right that the "institutions of a society had to evolve organically and could not be designed"?:

                                                                              The consequences of external reform: Lessons from the French Revolution, by Daron Acemoglu, Davide Cantoni, Simon Johnson, and James A Robinson, Vox EU: Different incentives, created by variation in key institutions such as property rights and the functioning of markets, explain why some countries are much more prosperous than others. Therefore, institutions often need to be reformed to improve the economic conditions in poor countries. There is a lot of controversy, however, about how this can be done, and, in particular, whether agents external to a country can successfully impose or foster institutional reform.

                                                                              “Big Bang” external reforms

                                                                              Knowing the answer to this question is important for understanding whether, for example, the mass expansion of resources for the IMF announced recently by the G20 is likely to be effective. Many, like Rodrik (2007), argue that external reform has been a failure and reject reform agendas such as the “Washington consensus” as being inappropriate to the problems of countries with poor institutions. This argument is reminiscent of Hayek (1960), who claimed that the institutions of a society had to evolve organically and could not be designed. Those who advocate these views point to the relative success of gradual Chinese economic reforms as opposed to reforms in the former Soviet Union, which took place in a “Big Bang” fashion with a lot of external influence. Interestingly, the conservative English philosopher Edmund Burke seems to have been a precursor to these views. In 1790, he condemned the radicalism and the interventionist spirit of the French Revolution and argued:

                                                                              “It is with infinite caution that any man should venture upon pulling down an edifice, which has answered in any tolerable degree for ages the common purposes of society, or on building it up again without having models and patterns of approved utility before his eyes.”(p.152).

                                                                              In Acemoglu, Cantoni, Johnson and Robinson (2009), we argue that the impact of the French Revolution on the institutions of Europe can be seen as a “natural experiment” that sheds light on these debates. After 1792, French armies invaded and reformed the institutions of many European countries. The package of reforms the French imposed on areas they conquered included the civil code, the abolition of guilds and the remnants of feudalism, the introduction of equality before the law, and the undermining of aristocratic privilege. These reforms clearly relate to the above-mentioned debates. They were imposed “Big Bang” style from the outside. And, institutions such as the civil code were self-consciously designed and were not necessarily “appropriate” for the lands on which they were imposed. If externally-imposed and “Big Bang” reform is generally costly or if designed institutions like the civil code create major distortions, the reforms should have had negative effects on nineteenth-century Europe.

                                                                              Continue reading "The Consequences of External Reform: Lessons from the French Revolution" »

                                                                                Posted by on Thursday, July 2, 2009 at 02:51 PM in Economics | Permalink  TrackBack (0)  Comments (16) 


                                                                                "Hire the Unemployed"

                                                                                The stimulus package had two components, new spending and tax cuts. Everybody knew that the spending component would take time to put into place, six months or more for a lot of the infrastructure projects, and that meant that we needed something to increase demand and provide a bridge until the new spending comes online.

                                                                                Enter the tax cuts that the GOP insisted upon, tax cuts that were a larger part of the stimulus package than I thought justified. These cuts were to come online immediately and stimulate demand until the spending could begin taking up some of the slack later in the year. I would have preferred targeted, non-infrastructure spending that could have been put in place almost as fast as the tax cuts (particularly those that simply require making existing programs more generous), but that type of spending was considered wasteful because it didn't add to our long-run capacity for growth and hence had little chance of being part of the stimulus package.

                                                                                The problem was partly bad luck. A crisis hit and we had the bad luck of having an administration that opposed active intervention and though there was a bit of a stimulus attempt through a one time tax rebate, a strategy theory predicts won't do much to help, the real action in terms of stimulating the economy was left to the new administration. So nothing was done, nothing could have been done until the new administration took over, and given the insistence that any new spending be on infrastructure projects with clear benefits, tax cuts were the main hope for an immediate effect.

                                                                                So if the policy has failed at this point, it is not the spending component since, fully consistent with predictions when it was enacted, it was going to be months before it could be of any help. What failed is the GOP's insistence that tax cuts be used to provide an immediate boost to the economy. Increasing food stamps, unemployment compensation, payments to help states with declining revenues and increasing demands for social services, payments to help unemployed workers maintain health care, digging (needed) holes, there were many, many other ways to provide more immediate relief and stimulate the economy at the same time, but no, it had to be tax cuts or nothing.

                                                                                Finally, I want to note that what we maximize matters. For example, we can maximize GDP growth over the next ten or twenty years, or we can maximize employment over the next few months. Which we choose to maximize has a big effect on the policies we put in place. If we use the stimulus money to maximize GDP and growth - which is essentially what we did - that will have a much slower effect on employment than if we maximize employment directly. The efficiency argument always leads you to maximize output, and efficiency prevailed in the structure of the current package, but I think an argument can also be made that maximizing employment provides social benefits that are just as large, or larger.

                                                                                Just noticed this, which makes a surprisingly similar point:

                                                                                A Message to President Obama: Stop Priming the Pump, Hire the Unemployed, by Pavlina R. Tcherneva: Many have called President Obama’s stimulus plan a return to Keynesian policy. Some of us who like reading Keynes professionally or for leisure have already been scratching our heads. I have wondered in particular whether the plan isn’t set up to work in a manner completely backwards from what Keynes himself had in mind when he advocated economic stabilization by government.

                                                                                There are two things to remember about Keynes’s fiscal policy proposals: 1) government spending was always linked to the goal of full employment... and 2) to achieve macro-stability and full employment, the government had to employ the unemployed directly into public works.

                                                                                By contrast, most modern economists believe that 1) there is some natural level of unemployment that includes the structurally unemployed, which governments cannot generally tackle, and that 2) public employment is an inefficient use of public resources.

                                                                                So, when the government is called to action, the economic profession has replaced Keynes’s “fiscal policy via public works” with a “leaky bucket pump-priming mechanism.”

                                                                                How is the latter policy supposed to work? Instead of employing the unemployed directly, the idea is to generate large enough government expenditures to produce a level of economic growth that would, in turn, gradually reduce unemployment. For example, the government could spend money on various private sector contracts, stimulate different private industries, offer investment subsidies and tax cuts, and increase unemployment insurance payments, in hope that it will boost GDP sufficiently to reduce unemployment to desired levels. This is essentially the underlying logic behind President Obama’s stimulus package. But it is also a bit of a gamble.

                                                                                Not all of these injections will be effective because the fiscal stimulus enters the economy through “a leaky bucket”. Some of the money will be lost in transit (because of administrative costs, for example) and much of it will have no direct job creation effects (e.g. the tax cut component of the recovery act). Nevertheless, despite this leaky bucket, the theory goes, sooner or later, large enough government expenditures will produce the kind of growth that would reduce unemployment. ...

                                                                                All of this is ... why Keynes never had any “leaky bucket” or “pump priming” idea in mind. For him “the real problem fundamental yet essentially simple…[is] to provide employment for everyone” (Keynes 1980, 267) and the most bang for the buck from fiscal policy would be achieved via direct job creation. This he called “on the spot” employment via public works.

                                                                                As I have argued elsewhere, it is useful to think of Keynesian fiscal policy, not as aggregate demand management, but as labor demand management. ...

                                                                                Commentators often call this a policy of “make work” but Keynes didn’t advocate digging holes, burying jars with money and digging them out, or any other similarly worthless projects. The key was to marry the two goals: to employ the unemployed directly and to make sure that they do useful things. Once they are put to work on a particular project, Keynes argued, “there can be only one object in the economy, namely to substitute some other, better, and wiser piece of expenditure for it” (Keynes 1982, 146). We might as well ask a very basic question: is there really a shortage of useful things to do?

                                                                                If we insist on calling ourselves Keynesians again, and more importantly, if President Obama’s plan for economic stabilization should generate rapid reduction in unemployment, it would help to set fiscal policy straight. Instead of relying on “leaky fiscal buckets” we could return to “labor demand management” a la Keynes that provides immediate employment opportunities to the unemployed via bold and creative public works projects, which generate useful output and services for all.

                                                                                  Posted by on Thursday, July 2, 2009 at 12:45 PM in Economics, Fiscal Policy, Unemployment | Permalink  TrackBack (0)  Comments (49) 


                                                                                  "The Purely Rational Economic Man is Indeed Close to Being a Social Moron"

                                                                                  Daniel Little discusses Karl Polyani's views on whether self-interest, rationality, and market institutions are universal features of human behavior:

                                                                                  Polanyi on the market, by Daniel Little: Karl Polanyi's The Great Transformation is a classic statement of a polar position in the issue of the universality of instrumental rationality and market institutions in explaining concrete historical circumstances in the recent and distant past. Polanyi maintains that the concept of economic rationality is a very specific historical construct that applies chiefly to the forms of market society that emerged in Western Europe in the early modern period. Market behavior came to replace other forms of motivation within European society in this period, and individuals came to act more and more on the basis of a calculation of self-interest. However, Polanyi holds that this form of behavior, like the economic institutions of the market within which it emerged, is highly specific to a particular time and place. To make use of this model of action as though it were a universal feature and determinant of human behavior is as unjustified as it would be to extend medieval chivalry to all times and places.

                                                                                  No society could, naturally, live for any length of time unless it possessed an economy of some sort; but previously to our time no economy has ever existed that, even in principle, was controlled by markets. . . . Gain and profit made on exchange never before played an important part in human economy. (Polanyi 1957:43)

                                                                                  While history and ethnography know of various kinds of economies, most of them comprising the institutions of markets, they know of no economy prior to our own, even approximately controlled and regulated by markets. . . . The role played by markets in the internal economy of the various countries . . . was insignificant up to recent times. (Polanyi 1957:44)

                                                                                  Against the idea that it is "natural" for men and women to be motivated primarily by self-interest, Polanyi writes:

                                                                                  For, if one conclusion stands out more clearly than another from the recent study of early societies it is the changelessness of man as a social being. His natural endowments reappear with a remarkable constancy in societies of all times and places; and the necessary preconditions of the survival of human society appear to be immutably the same. (Polanyi 1957:46)

                                                                                  The outstanding discovery of recent historical and anthropological research is that man's economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end. Neither the process of production nor that of distribution is linked to specific economic interests attached to the possession of goods; but every single step in that process is geared to a number of social interests which eventually ensure that the required step be taken. . . . The economic system will be run on non-economic motives. (Polanyi 1957:46)

                                                                                  Thus Polanyi maintains that it is socially motivated behavior -- ªbehavior motivated toward the interests of one's family, clan, or village” -- rather than self-interested behavior that is "natural" for human beings; rational self-interest is rather a feature of a highly specific society: market society. Instead, Polanyi's account urges that the analysis pay primary attention to patterns of reciprocity and redistribution, shared values, traditions, and the determining role of community and politics. And he argues that virtually every society – traditional as well as modern – depends upon these sorts of social motivations.

                                                                                  In place of economic rationality and the market mechanism providing the basis for organization of the premarket economy, Polanyi argues that communitarian patterns of organization are to be found in a range of traditional societies:

                                                                                  Continue reading ""The Purely Rational Economic Man is Indeed Close to Being a Social Moron"" »

                                                                                    Posted by on Thursday, July 2, 2009 at 12:36 AM in Economics | Permalink  TrackBack (0)  Comments (51) 


                                                                                    Stiglitz: The UN Takes Charge (Update: and The Economic Lessons of the Iraq War)

                                                                                    Joseph Stiglitz says the UN has a key role to play in "reforming the global financial and economic system":

                                                                                    The UN Takes Charge, by Joseph Stiglitz, Commentary, Project Syndicate: ...On June 23, a United Nations conference ... reached a consensus both about the causes of the downturn and why it was affecting developing countries so badly. It outlined some of the measures that should be considered and established a working group to explore the way forward...

                                                                                    The agreement was ... in many ways ... a clearer articulation of the crisis and what needs to be done than that offered by the G-20, the UN showed that decision-making needn’t be restricted to a self-selected club, lacking political legitimacy, and largely dominated by those who had considerable responsibility for the crisis in the first place. Indeed, the agreement showed the value of a more inclusive approach – for example, by asking key questions that might be too politically sensitive for some of the larger countries to raise, or by pointing out concerns that resonate with the poorest, even if they are less important for the richest.

                                                                                    One might have thought that the United States would have taken a leadership role, since the crisis was made there. Indeed, the US Treasury (including ... members of President Barack Obama’s economic team) pushed capital- and financial-market liberalization, which resulted in the rapid contagion of America’s problems around the world. ...[M]any participants were simply relieved that America did not put up obstacles..., as would have been the case if George W. Bush were still president. ...

                                                                                    The most sensitive issue touched upon by the UN conference – too sensitive to be discussed at the G-20 – was reform of the global reserve system. ... On the last day of the conference, as America was expressing its reservations about even discussing ... this issue..., China was once again reiterating that the time had come to begin working on a global reserve currency. Since a country’s currency can be a reserve currency only if others are willing to accept it as such, time may be running out for the dollar.

                                                                                    Emblematic of the difference between the UN and the G-20 conferences was the discussion of bank secrecy: whereas the G-20 focused on tax evasion, the UN Conference addressed corruption, too, which some experts contend gives rise to outflows from some of the poorest countries that are greater than the foreign assistance they receive.

                                                                                    The US and other advanced industrial countries pushed globalization. But this crisis has shown that they have not managed globalization as well as they should have. If globalization is to work for everyone, decisions about how to manage it must be made in a democratic and inclusive manner... The UN, notwithstanding all of its flaws, is the one inclusive international institution. This UN conference ... demonstrated the key role that the UN must play in any global discussion about reforming the global financial and economic system.

                                                                                    Update: Just noticed something else from Stiglitz, along with Linda J. Bilmes, on the economic lessons of the Iraq war:

                                                                                    The U.S. in Iraq: An economics lesson, by Linda J. Bilmes and Joseph Stiglitz, Commentary, LA Times: Tuesday, the U.S. "stood down" in Iraq, finalizing the pullout of 140,000 troops from Iraqi cities and towns -- the first step on the long path home. ...

                                                                                    But not so fast. The conflict that began in 2003 is far from over..., and the next chapter -- confronting a Taliban that reasserted itself in Afghanistan while the U.S. was sidetracked in Iraq -- will be expensive and bloody. ...

                                                                                    Meanwhile, in Iraq,... U.S. officials have said we are likely to station 50,000 troops at military bases in the country for the foreseeable future. This is because the ... country ranks high on lists of the most dangerous places on Earth, with a continual stream of suicide bombings and murders...

                                                                                    Moreover, the U.S. has barely begun to face the enormous financial bill for the war.

                                                                                    Continue reading "Stiglitz: The UN Takes Charge (Update: and The Economic Lessons of the Iraq War)" »

                                                                                      Posted by on Thursday, July 2, 2009 at 12:09 AM in Development, Economics, Financial System, Politics | Permalink  TrackBack (0)  Comments (30) 


                                                                                      links for 2009-07-02

                                                                                        Posted by on Thursday, July 2, 2009 at 12:06 AM in Economics, Links | Permalink  TrackBack (0)  Comments (32) 


                                                                                        links for 2009-07-02

                                                                                          Posted by on Thursday, July 2, 2009 at 12:03 AM in Economics | Permalink  TrackBack (0)  Comments (0) 


                                                                                          Wednesday, July 01, 2009

                                                                                          "A Bubble Mystery"

                                                                                          Barkley Rosser has a post that elaborates on comments he made here to Should We Pop Bubbles?, but first some background. This is from last July:

                                                                                          Gradual Decline before the Crash?: Barkley Rosser says the period after the peak of a speculative bubble can often be broken into two periods, the first characterized by a gradual decline, i.e. a period of "financial distress," and a second where there is a massive panic and crash. He also says he has a model that can explain how this happens...:

                                                                                          Falling from the Period of Financial Distress into the Panic and Crash, by Barkley Rosser: In 1972, Hyman Minsky described the "period of financial distress," in a paper in a journal that no longer exists..., "Financial Instability: The Economics of Disaster." Charles P. Kindleberger picked up on this and followed Minsky's analysis in his famous book, Manias, Panics, and Crashes: A History of Financial Crises, the 4th edn of which appeared in 2000... The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revival, but finally giving up in the final collapse. According to Appendix B of Kindleberger's 2000 edition, 37 of the 47 great historical speculative bubbles exhibited such a period before the final crash, even though all the theoretical models predict a crash immediately following the peak with no such period.

                                                                                          In 1991 I published the first mathematical model of such a phenomenon in my book From Catastrophe to Chaos: A General Theory of Economic Discontinuities_(Kluwer, Chap. 5)..., although nobody seems to have noticed... In 1997, I published a paper describing this model (and related matters)... This paper has never been cited. More recently I have coauthored a paper that ...[is] now under a long revise and resubmit, still waiting for an answer ... with Mauro Gallegati and Antonio Palestrini, "The Period of Financial Distress in Speculative Markets: Interacting Heterogeneous Agents and Financial Constraints" (available at my website), that lays all this out in much more up-to-date mathematical modeling.

                                                                                          So, why am I boring all of you with this self-citation? Well, Dean Baker is constantly claiming credit for his forecasts of doom and gloom. It looks like we might be finally reaching the big crash in the US mortgage market after a period of distress that started last August (if not earlier). I and my coauthors are the only people to have provided actually formal models of this phenomenon, beyond the verbal and historical discussions provided by the brilliant Minsky and Kindleberger (both of whom I knew...). I have been forecasting this in unpublished lectures all over the globe for years, but never have put it up into the blogosphere. So, I am claiming credit, to the extent it is due, although the basic ideas were clearly laid out earlier by Minsky and Kindleberger. ...

                                                                                          Here's the follow-up:

                                                                                          Update on the Period of Financial Distress and a Bubble Mystery, by Barkley Rosser: Nearly a year ago (7/12/08) I posted here on "Falling from the Period of Financial Distress into Panic and Crash" In that I noted my own work on this concept, which Charles Kindleberger claimed in his Manias, Panics, and Crashes has been the most common pattern of speculative bubbles and crashes (37 out of 47 bubbles listed in Appendix B of his 2000 4th edition). What is involved is for there to be a gradual decline in prices initially after the peak of a bubble, with the crash coming sometime later. The paper I cited then on this by Mauro Gallegati, Antonio Palestrini, and me ... has now been accepted for publication and is forthcoming in Macroeconomic Dynamics.

                                                                                          The three patterns that Kindleberger, drawing on the work of Hyman Minsky, argued we have generally seen are ones with such a period of distress as described above, ones that go up to a peak and then crash hard (which are what most theoretical models of crashes predict), and ones that go up to a peak and then decline gradually without a crash, but usually a bit faster than they went up. In the last few years I would argue we have seen all three patterns. The peak-followed-by-crash pattern looks like the oil market last year, which hit $147 per barrel last July only to fall hard to $32 per barrel by November. The more or less symmetric up-then-down-without a crash pattern looks like the US housing market, which, according to the Case-Shiller index, began rising in 1998, peaked in mid-2006, and has been going down since about the way it went up, with quite a ways to go.

                                                                                          Last year I had it in my mind that the global financial derivatives market smelled like a period of financial distress pattern, and now I think that it was indeed. The peak was in August 2007, when the problems in those markets first began to appear. The crash was the dramatic "Minsky moment" in mid-September 2008.

                                                                                          Which brings me to a fourth pattern that is somewhat mysterious, a variation on the pattern that does not have a crash. Whereas most such bubbles go down more rapidly than they went up, and some go down at about the same rate, there is one that has gone down at a much slower rate, indeed may still be in its decline. I am referring to housing in Japan. A graph of the pattern up to 2005 can be seen here. Around 2006 there was a brief cessation of the decline, but it has since resumed. In any case, that figure shows that the index rose in three years from 150 to its peak around 200, but took ten years thereafter to get back to 150, and it took 15 years from the peak in 1991 to get back down to the level it was in 1986, a clear asymmetry in the direction of going up much faster than it has gone down.

                                                                                          Now, according to private communication from Kindlebeger to me, this is the only major bubble in world history to exhibit such a pattern, and why it has done so remains a mystery. I saw a paper (still unpublished) some years ago that argued that it was Japanese banks manipulating the real estate market to keep the value of their most important collateral from declining too rapidly in the face of broader financial pressure that have been behind this pattern, but I have not seen that confirmed. That would suggest that the pattern has had deep implications for the broader Japanese economy. In any case, this curious decline in Japan remains a mystery (and some say that US housing prices could go down for a much longer time than many think, pointing to this strange case), but it may ultimately have to do with the Japanese wishing to preserve their broader economic system in the face of pressures to more deeply transform it.

                                                                                            Posted by on Wednesday, July 1, 2009 at 04:37 PM in Economics | Permalink  TrackBack (0)  Comments (22) 


                                                                                            Video: Krugman and Taylor

                                                                                            I thought the list of questions asked by the moderator, Fareed Zakaria, and particularly the way some of the questions were framed said a lot about how the debate over economic policy is playing in public (e.g. calling Robert Samuelson a "sober guy" in the premise to a question on health care reform):

                                                                                              Posted by on Wednesday, July 1, 2009 at 02:35 PM in Economics, Video | Permalink  TrackBack (0)  Comments (5) 


                                                                                              "Deficits are Worrisome, but Not as Worrisome as an Economy that is Not Growing and is Rapidly Shedding Jobs"

                                                                                              What do you think of this administration's arguments for deficit spending to spur the economy?:

                                                                                              Remarks of the Chair of the Council of Economic Advisers: ...I very much appreciate the opportunity to speak with you today. I will take this time to discuss recent developments in the economy, and some of the challenges the nation faces going forward. I ... also ... want to discuss some larger issues about how fiscal policy should be evaluated...

                                                                                              I view the economy as experiencing something similar to a tug of war. ... On the contraction end of the rope are the shocks that the U.S. economy has experienced... Pulling hard on the other end of the rope are the expansionary forces of monetary and fiscal policy—the Federal Reserve’s series of interest rate cuts and the Administration’s ... stimulus package...

                                                                                              Monetary and fiscal policy – the two main levers of macroeconomic stabilization policy – are both actively engaged..., both leaning hard against the headwinds...I will not say much today about monetary policy. This is not to diminish in any way the crucial role of the Federal Reserve in helping to counter the adverse forces in this recession. But fiscal policy is my beat as CEA chair, so that will be the focus of my comments. ...

                                                                                              [A]nalysis done within the Administration has shown ... that ... the ... job market is not what we would like it to be right now, but it would have been worse without the Administration’s actions.

                                                                                              One can view the short-run effects [of our policies]... from a classic Keynesian perspective. ... This ... helps maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks. ...

                                                                                              The qualitative effects ... on the short-run output gap ... are not controversial. There is less agreement on quantifying these effects—how many jobs are created, how much growth is increased, and so on. To answer these questions, one would normally turn to a macroeconomic model such as those maintained by private forecasting firms, the Federal Reserve, and other institutions. I view such models as being very useful at relatively short time horizons such as one or two years. ...

                                                                                              Of course, the expansionary effects ... will be offset to some degree by the effects of the budget deficits that arise... Deficits can raise interest rates and crowd out of investment, although I should note that the magnitude of this effect is much debated in the economics literature. The main problem now facing the U.S. economy is not high interest rates...

                                                                                              The Administration would prefer not to have deficits, but deficit reduction is only one of many goals. ... Deficits are worrisome, but not as worrisome as an economy that is not growing and is rapidly shedding jobs. ...

                                                                                              The most important fiscal challenge facing the United States is not the current short-term deficits,... but instead the looming long-term deficits associated with the rise in entitlement spending ...

                                                                                              We do not yet have all the answers to the problems posed by entitlement costs, but we are hard at work. ... These longer-term issues, however, should not blind us to the immediate needs of the economy. The President came into office inheriting an economy ...[in] a recession. He has responded vigorously to the challenges and, as a result, the current outlook for the U.S. economy is bright...

                                                                                              That was Greg Mankiw, on September 15, 2003 in a speech to the NABE. [Note: verb tense changed from past to present in a few places, 'chairman' was changed to 'chair,' and he is, of course, mainly promoting tax cuts, not government spending.]

                                                                                                Posted by on Wednesday, July 1, 2009 at 01:06 PM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (16) 


                                                                                                "The Revival of the Big Markets vs. State Planning Debate"

                                                                                                The possibility of an outbreak of protectionism has been raised frequently as a potential byproduct of the recession, but that may not be the biggest concern with regard to developing countries. When Stiglitz and Easterly agree, that's noteworthy:

                                                                                                Joe Stiglitz preaches markets to poor countries!, by William Easterly: Stiglitz in the current issue of Vanity Fair is afraid how poor countries will respond to the global crisis and the record of American hypocrisy on economic policy (like what America prescribed for itself in 2008-2009 vs. what it prescribed for Asia during 1997 crisis). All of this will tarnish market economics so much, fears Stiglitz, that poor countries will turn away from markets altogether in favor of some heavy-handed state planning and socialism. Stiglitz, who is not usually considered market economics’ best friend, is right to be scared. ...

                                                                                                One of the reasons to be worried is the precedent from the 1930s Depression – not the usual worry about a huge wave of global protectionism. No, the worry is about the intellectual precedent that the Depression so discredited markets that government planning and intervention became the default model of development economics for the next 30 years – the 1950s through the 1970s.

                                                                                                I’m thrilled to have a heavyweight like Joe Stiglitz to make this case better and more credibly than I could.... The issue now is not subtleties about the right type of financial regulation, global vs. local standards, or calibrating fiscal stimulus. The issue in development now is the revival of the big markets vs. state planning debate. Let’s hope it comes out differently this time than it did for early development economics after the Depression.

                                                                                                Here's a small part of Stiglitz' essay:

                                                                                                Wall Street’s Toxic Message, by Joseph Stiglitz: ...[N]o crisis, especially one of this severity, recedes without leaving a legacy. And among this one’s legacies will be a worldwide battle over ... what kind of economic system is likely to deliver the greatest benefit to the most people. Nowhere is that battle raging more hotly than in the Third World... In much of the world,... the battle between capitalism and socialism—or at least something that many Americans would label as socialism—still rages. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come. ...

                                                                                                I worry that, as [other countries] see more clearly the flaws in America’s economic and social system, many in the developing world will draw the wrong conclusions. A few countries—and maybe America itself—will learn the right lessons. They will realize that what is required for success is a regime where the roles of market and government are in balance, and where a strong state administers effective regulations. They will realize that the power of special interests must be curbed.

                                                                                                But, for many other countries, the consequences will be messier, and profoundly tragic. The former Communist countries generally turned, after the dismal failure of their postwar system, to market capitalism, replacing Karl Marx with Milton Friedman as their god. The new religion has not served them well. Many countries may conclude not simply that unfettered capitalism, American-style, has failed but that the very concept of a market economy ... is ... unworkable under any circumstances. Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail. The poor suffered under market fundamentalism—we had trickle-up economics, not trickle-down economics. But ... these new regimes ... will not deliver growth. Without growth there cannot be sustainable poverty reduction. There has been no successful economy that has not relied heavily on markets. ... The ... governments brought to power on the basis of rage against American-style capitalism ... will lead to more poverty. ...

                                                                                                Faith in democracy is another victim. In the developing world, people look at Washington and see a system of government that allowed Wall Street to write self-serving rules which put at risk the entire global economy—and then, when the day of reckoning came, turned to Wall Street to manage the recovery. They see continued re-distributions of wealth to the top of the pyramid, transparently at the expense of ordinary citizens. They see, in short, a fundamental problem of political accountability in the American system of democracy. After they have seen all this, it is but a short step to conclude that something is fatally wrong, and inevitably so, with democracy itself. ...

                                                                                                Francis Fukuyama ... was wrong to think that the forces of liberal democracy and the market economy would inevitably triumph, and that there could be no turning back. But he was not wrong to believe that democracy and market forces are essential to a just and prosperous world. The economic crisis, created largely by America’s behavior, has done more damage to these fundamental values than any totalitarian regime ever could have. ...

                                                                                                  Posted by on Wednesday, July 1, 2009 at 01:29 AM in Development, Economics, Financial System | Permalink  TrackBack (0)  Comments (36) 


                                                                                                  "The Treasury View"

                                                                                                  Free Exchange:

                                                                                                  The Treasury view, Free Exchange: ...Noam Scheiber has a nice post up examining the view of PPIP—the plan to sell subsidised toxic assets at auction—from inside the Treasury. Here's a quote from a Treasury official:

                                                                                                  ...If you had asked--I don’t want to speak for the secretary--what’s problem number one? I think he'd say capital. Problem two? Capital. Problem three? Capital. Everything was in the service of that view. The legacy loans program was meant to help clean balance sheets. It was not an independent good in itself. It was seen as friendly to equity raising. Now people say the legacy loans thing is not gaining as much traction, so is that a failure? But because we had a good outcome in terms of raising equity, [the banks] were able to raise equity without shedding assets ... you should be okay with that.

                                                                                                  Mr Scheiber also reprints a quote from a Goldman Sachs employee, originally in the Wall Street Journal, noting that PPIP is "the greatest program that never occurred... [because it] created confidence in the markets so banks can raise equity capital".

                                                                                                  I don't know that I buy the Treasury spin—that they saw that banks needed more capital than the government could provide, and so they crafted an incredibly generous asset purchase plan understanding that it would boost Wall Street spirits, allowing banks to raise private capital and thereby making actual deployment of the plan unnecessary. Remember just how dire things appeared at the time of the plan's construction, and recall how many defenders of the plan—myself included—argued that there were no other options with tolerable risk levels available. Meanwhile, it's not clear that PPIP (as opposed to other interventions or the natural resolution of the crisis) had anything to do with the market's rebound, which began well after the initial description of the administration's proposal and well before the release of key programme details.

                                                                                                  Which isn't to say that no one in the administration foresaw this possibility or planned for it. I would argue, however, that the current state of affairs was not really the expected outcome, and that the banking plan benefitted enormously from events outside of Treasury's control.

                                                                                                  I don't disagree with that. But if it's true that the plan inspired confidence, intended or not, and that caused private investors to put capital into these institutions based upon the assumption that the banks would be made healthier by ridding themselves of toxicity through the PPIP, and now the government says "just kidding," isn't that a double-cross? Would the private investors have still put capital into the banks had they known the double-cross was coming? And if they wouldn't have, doesn't the continued presence of these assets on the books mean there's more risk present than we ought to be comfortable with?

                                                                                                    Posted by on Wednesday, July 1, 2009 at 01:02 AM in Economics, Financial System | Permalink  TrackBack (0)  Comments (6) 


                                                                                                    links for 2009-07-01

                                                                                                      Posted by on Wednesday, July 1, 2009 at 12:06 AM in Economics, Links | Permalink  TrackBack (0)  Comments (18)