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Friday, January 21, 2011

Paul Krugman: China Goes to Nixon

Will China's currency policy lead to a "full-fledged" economic crisis?:

China Goes to Nixon, by paul Krugman, Commentary, NY Times: With Hu Jintao, China’s president, currently visiting the United States, stories about growing Chinese economic might are everywhere. And those stories are entirely true: ...it’s growing fast, and given its sheer size it’s well on the way to matching America as an economic superpower.
What’s also true, however, is that China has stumbled into a monetary muddle that’s getting worse with each passing month. ... The root cause ... is its weak-currency policy, which is feeding an artificially large trade surplus. As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included.
But a policy can be bad for us without being good for China. ...Chinese currency policy is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.
One way to think about what’s happening is that inflation is the market’s way of undoing currency manipulation. ... China’s leaders are, however, trying to prevent this outcome, not just to protect exporters’ interest, but because inflation is even more unpopular in China than it is elsewhere. ...
But for whatever reason — the power of export interests, refusal to do anything that looks like giving in to U.S. demands or sheer inability to think clearly — they’re not willing to deal with the root cause and let their currency rise. Instead, they are trying to control inflation by raising interest rates and restricting credit.
This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies. More to the point from China’s perspective, however, is that it’s not working. Credit limits are proving hard to enforce and are being further undermined by inflows of hot money from abroad.
With efforts to cool the economy falling short, China has been trying to limit inflation with price controls — a policy that rarely works. In particular, it’s a policy that failed dismally the last time it was tried here, during the Nixon administration. (And, yes, this means that right now China is going to Nixon.)
So what’s left? Well, China has turned to the blame game, accusing the Federal Reserve (wrongly) of creating the problem by printing too much money. But ... blaming the Fed ... won’t change U.S. monetary policy, nor will it do anything to tame China’s inflation monster.
Could all of this ... turn into a full-fledged crisis? If I didn’t know my economic history, I’d find the idea implausible. After all, the solution to China’s monetary muddle is both simple and obvious: just let the currency rise, already.
But I do know my economic history, which means that I know how often governments refuse, sometimes for many years, to do the obviously right thing — and especially when currency values are concerned. Usually they try to keep their currencies artificially strong rather than artificially weak; but it can be a big mess either way.
So our newest economic superpower may indeed be on its way to some kind of economic crisis, with collateral damage to the world as a whole. Did we need this?

    Posted by on Friday, January 21, 2011 at 01:08 AM in China, Economics, International Finance | Permalink  Comments (73) 


    "Life After Captitalism"

    Robert Skidelsky wonders if the end of the road for capitalism is within sight:

    Life after Capitalism, by Robert Skidelsky, Commentary, Project Syndicate: ...Capitalism may be close to exhausting its potential to create a better life – at least in the world’s rich countries. By “better,” I mean better ethically, not materially. Material gains may continue, though evidence shows that they no longer make people happier. ...
    This is not to denigrate capitalism. It ... has lifted a large part of the world out of poverty. Yet what happens to such a system when scarcity has been turned to plenty? Does it just go on producing more of the same...
    There have always been huge moral questions about capitalism... Capitalism’s defenders sometimes argue that the spirit of acquisitiveness is so deeply ingrained in human nature that nothing can dislodge it. But ... Greed, avarice, and envy were among the deadly sins. Usury ... was an offense against God. It was only in the eighteenth century that greed became morally respectable. ...
    The dishonoring of greed is likely only in those countries whose citizens already have more than they need. ... The economic justification for large income inequalities – the need to stimulate people to be more productive – collapses when growth ceases to be so important. Perhaps socialism was not an alternative to capitalism, but its heir. ...

      Posted by on Friday, January 21, 2011 at 12:42 AM in Economics, Income Distribution | Permalink  Comments (39) 


      Thursday, January 20, 2011

      links for 2011-01-20

        Posted by on Thursday, January 20, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (20) 


        "Greg Mankiw's Thinking Cap"

        I can't let this go without comment, but being short on time, I'll turn it over to Ezra Klein:

        Greg Mankiw's thinking cap, by Ezra Klein: Here's an interesting mixture of callousness and accidental truth lurking within Greg Mankiw's satirical proposal to reduce the budget deficit:

        The essence of the plan is the federal government writing me a check for $1 billion. The plan will be financed by $3 billion of tax increases. According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

        Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit. Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit. But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

        Like health-care reform, Greg Mankiw's plan really would reduce the budget deficit. That's been contested, so I'm glad to see Mankiw admit it. But Mankiw's broader point is that giving Greg Mankiw a billion dollars to write misleading political commentary would be a poor use of resources. And I agree. But he is analogizing giving Greg Mankiw a billion-dollar check to giving health-care insurance to 32 million people who, in the vast majority of cases, can't get it themselves. I know that Harvard University offers insurance to its employees and they do that because their employees, like Professor Mankiw, would be quite angry if they didn't. They don't think of insurance as an absurd extravagance or a billion-dollar check from the sky. They think of it as something much more like a necessity, something that their workers wouldn't be willing to go without. Something that I'd bet Mankiw himself doesn't go without. Maybe I'm wrong. If not, there's a real callousness to this post.

        Now for the accidental truth: Mankiw's analytical claim is that it's somehow peculiar to believe a bill reduces the deficit because it raises more money than it spends. After all, the spending doesn't reduce the deficit. His apparent belief that the "revenues and spending cuts" side of legislation has nothing to do with the "new spending or tax cuts" side helps explain why he joined the Bush administration's Council of Economic Advisers in May 2003, the same month that the Bush administration's second set of unpaid-for tax cuts was passing through Congress, and a few months before the Bush administration's completely unpaid-for Medicare Prescription Drug Benefit was signed into law. That's a creative way to look at legislation, and I'm sure it came in handy when defending the Bush administration's economic policies.

        Here's the thing about the thinking Mankiw is criticizing: It actually reduces the deficit, and it does it while mostly ending the days when Americans would find themselves involuntarily uninsured. You can't say that for the thinking that drove the fiscal policies of the administration he served in, or that led him to analogize a billion-dollar check for himself to health-care coverage for the poor. It's another example of the ACA's opponents conveniently omitting the uninsured from the discussion and developing a new and inconsistent definition of fiscal responsibility.

        To equate the good that comes from covering people with health insurance -- insurance that the private market will not provide for them itself -- with giving Mankiw a handout of a billion dollars is pretty silly. He knows better. Apparently he doesn't have a plan to accomplish the same good for less or he would have told us about that instead of trying to add fog to the debate. Or, perhaps he does have a plan, but his view is that the benefits from helping people do not cover the costs, so it wouldn't be worth it -- hence the charge of callousness. In any case, the important question has nothing to do with the deficit per se, it's whether correcting for this market failure in health insurance markets produces social benefits that exceed the costs. If he believes the benefits of extending health care coverage to people who cannot get it any other way are small, he should say so directly. If he doesn't believe that, then stop the fog machine, actually use the thinking cap, and give us the alternative plan.

          Posted by on Thursday, January 20, 2011 at 02:25 PM in Budget Deficit, Economics | Permalink  Comments (54) 


          "Willing to Work?"

          I wish I had more time to take this on, but you can handle it in comments. It's the implication that lazy workers are the cause of the unemployment problem (and the claim is further that government programs such as unemployment compensation and food stamps are a big part of the driving force behind the "laziness"):

          Willing to Work?, by Casey Mulligan: Some people, described in this article as "eager to work," found 1000s of jobs in construction.

          I have also done research on the recession-era employment rates of eager workers.

          Very quickly, a big problem here is that if people with better job prospects are more likely to be motivated to search, you don't learn much by observing that they were correct in their assessment of their chances. Another big problem is that there are far fewer jobs available as compared to the people who want them, and motivation cannot resolve the shortage of jobs. In any case, here are comments on the seasonal data analysis used in the link to "eager workers" from Tim Duy ("It is Such a Silly Analysis") and Menzie Chinn ("The Hazards of Interpreting Seasonals").

           

           

            Posted by on Thursday, January 20, 2011 at 11:14 AM in Economics, Unemployment | Permalink  Comments (36) 


            Shiller: A People's Economics

            Busy week, busy day, so no time to say much right now. But the comments on this one might be better left to all of you in any case:

            A People’s Economics, by Robert J. Shiller, Commentary, Project Syndicate: We are in the midst of a boom in popular economics: books, articles, blogs, public lectures, all followed closely by the general public.
            I recently participated in a panel discussion of this phenomenon at the American Economic Association annual meeting... An apparent paradox emerged...: the boom in popular economics comes at a time when the general public seems to have lost faith in professional economists... So, why is the public buying more books by professional economists?
            The most interesting explanation I heard was that economics has become more interesting, because it no longer seems to be a finished and closed discipline. ...
            The financial crisis delivered a fatal blow to ... overconfidence in scientific economics. It is not just that the profession didn’t forecast the crisis. Their models, taken literally, sometimes suggested that a crisis of this magnitude couldn’t happen.
            One way to interpret this is that the economics profession was not fully accounting for the economy’s human element, an element that can’t be reduced to mathematical analysis. ...
            Of course, economics is in many ways a science, and the work of our scholars and their computer models really does matter. But, as the economist Edwin R. A. Seligman put it in 1889, “Economics is a social science, i.e., it is an ethical and therefore an historical science….It is not a natural science, and therefore not an exact or purely abstract science.”
            To me, and no doubt to the other panelists, part of the process of pursuing the inexact aspects of economics is speaking honestly to the broader public, looking them in the eye, learning from them, reading the emails they send, and then searching one’s soul to decide whether one’s favored theory is really close to the truth.

              Posted by on Thursday, January 20, 2011 at 10:36 AM in Economics, Methodology | Permalink  Comments (17) 


              Tax-Exempt Bonds: Who Benefits?

              James Kwak:

              Tax-Exempt Bonds: ...  Since the beginning of time (OK, the beginning of the income tax), interest on munis has been exempt from federal income tax; this is why munis are also known as tax-exempt bonds. In other words, this is a federal subsidy for state and local borrowing. There are various policy arguments for and against such a subsidy, but the basic fact is that we have a federal system in which power and responsibility are shared between the national, state, and local governments, and this is one way (not the only one) that the national government distributes money to state and local governments. The simplest alternative would be for the national government to simply hold onto its money and decide how to spend it, instead of funneling it to state and local governments to let them decide how to spend it. So the basic principle of the national government distributing money back to the states is one that Republicans should be favorable to.
              But the problem is that, like most subsidies effected through the tax code, this one is inefficient. It works like this. Say that, absent the subsidy, a state would have to issue bonds with a yield of 5 percent. (That is, corporate bonds with otherwise equivalent terms issued by a company with an equivalent credit rating would yield 5 percent.) If the bond is tax exempt, however, a buyer in the 35 percent tax bracket would be willing to accept a yield of only 3.25 percent rather than 5 percent (because $5 before tax is equivalent to $3.25 after tax.) In that case, the federal government is giving up $1.75 (per year, assuming a $100 bond), and it’s all going to the state issuing the bond, which has lower interest costs; the buyer is indifferent between the two scenarios. That’s a subsidy.
              In practice, however, it doesn’t work like that. The actual yield on tax-exempt bonds is higher than necessary for top-bracket bond buyers to break even. Historically, it’s been about 75 percent of the taxable yields (according to my tax casebook — Graetz and Schenk, 6th ed., p. 224). In the example above, that would be a tax-free yield of 3.75 percent. That means that the $1.75 subsidy is now being shared between the state and the bond buyer. The state gets $1.25 in lower interest costs, and the buyer gets $0.50 in interest she could not have gotten without the subsidy.
              And who buys tax-exempt bonds? Rich people. So by funneling the subsidy through this tax exemption, part of it gets siphoned off by the rich.

              He notes that a proposal designed to eliminate the part of the subsidy that "gets siphoned off by the rich" was -- surprise -- opposed by Republicans.

                Posted by on Thursday, January 20, 2011 at 02:00 AM in Economics, Taxes | Permalink  Comments (27) 


                Does Borderless Economy Equal, Jobless Prosperity?

                Nancy Folbre:

                Borderless Economy, Jobless Prosperity, by Nancy Folbre, Economix: Why has the economic recovery left workers behind? ... Many journalists argue that globalization is partly to blame... Few economists like this argument, but even some mainstream savants like Alan Blinder ... express concern about the effects of offshoring. ...
                A recent Time magazine article by Zachary Karabell referred to the new joblessness as a part of a megatrend toward globalization that we just have to live with. So much depends on who “we” are.
                During the 25 years after World War II, the interests of American investors and workers were closely, though not perfectly, aligned. Productivity increases were passed on in the form of higher wages that, in turn, fueled increasing demand for domestically produced goods and services.
                Businesses willingly paid taxes to support public programs designed to improve the education, health and security of the labor force on which they relied. ...
                Large corporations are no less patriotic now than they were then. But their economic incentives have changed. Facing intensified international competition, they have little reason to care about the nationality of their workers, consumers or investors.
                Fans of globalization point to many economic benefits: lower-priced consumer goods, rewards for technological innovation and higher living standards for many workers in developing countries.
                But however significant these benefits, the other side of the ledger reveals significant costs arising from political realignment and efforts to escape regulation and taxes.
                Jobless growth is only one symptom of increased social conflict, intensified economic inequality and weakened democracy. The prosperity in jobless prosperity exists only for the rich.

                  Posted by on Thursday, January 20, 2011 at 01:47 AM in Economics | Permalink  Comments (36) 


                  Wednesday, January 19, 2011

                  links for 2011-01-19

                    Posted by on Wednesday, January 19, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (25) 


                    Simon Johnson: The Poor Did Not Cause the Crisis

                    I've made this point again and again, the poor did not cause the crisis. But since the myth that government support of housing for the poor caused the crisis validates the preconceptions of those who believe government is the problem -- the government's use of their hard-earned money to support the 'unworthy' poor in particular -- it's a falsehood that just won't go away:

                    Did the Poor Cause the Crisis?, by Simon Johnson, Commentary, Project Syndicate: The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. Is government to blame for what went wrong, and, if so, in what sense?
                    In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford.
                    This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But ... do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?
                    Not according to Daron Acemoglu of MIT...
                    The FCIC Republicans are right to place the government at the center of what went wrong. But this was not a case of over-regulating and over-reaching. On the contrary, 30 years of financial deregulation, made possible by capturing the hearts and minds of regulators, and of politicians on both sides of the aisle, gave a narrow private-sector elite – mostly on Wall Street – almost all the upside of the housing boom.
                    The downside was shoved onto the rest of society, particularly the relatively uneducated and underpaid, who now have lost their houses, their jobs, their hopes for their children, or all of the above. These people did not cause the crisis. But they are paying for it.

                    The reasoning is explained in more detail in the article (and for more debunking, see here or the links here).

                      Posted by on Wednesday, January 19, 2011 at 11:01 AM in Economics, Financial System | Permalink  Comments (26) 


                      When Moralities Collide

                      Daniel Little:

                      Rawls on political liberalism, by Daniel Little: Long after the transformative impact Rawls brought to social and political philosophy..., Rawls continued to wrestle with ... how a just society ought to encompass major disagreements among its citizens about values and "conceptions of the good;" and much of his thinking is reflected in his 1993 collection of essays, Political Liberalism. Here is how he formulates the central problem:

                      A modern democratic society is characterized not simply by a pluralism of comprehensive religious, philosophical, and moral doctrines but by a pluralism of incompatible yet reasonable comprehensive doctrines. No one of these doctrines is affirmed by citizens generally. Nor should one expect that in the foreseeable future one of them, or some other reasonable doctrine, will ever be affirmed by all, or nearly all, citizens. Political liberalism assumes that, for political purposes, a plurality of reasonable yet incompatible comprehensive doctrines is the normal result of the exercise of human reason within the framework of the free institutions of a constitutional democratic regime. Political liberalism also supposes that a reasonable comprehensive doctrine does not reject the essentials of a democratic regime. (xvi)

                      ... How in the context of this pluralism of important value systems, is it possible for a modern society to nonetheless possess the features of civility and stability that we would desire?...

                      One prior thought we may have had about a liberal society is that the state establishes no more than a neutral system of law... So the liberal state is a neutral state -- one that gives no privilege to one conception of the good over another.

                      Neutrality is certainly part of the ideal of a liberal state; but it isn't quite enough. The reason is that some conceptions of the good and the right require the intervention of the state for enforcement. If the Alpha group believe that fetal stem cells are nascent human beings and therefore should never be used for the purpose of scientific research, while the Beta group believe that fetal stem cells are no more than useful compounds of organic molecules that can relieve human misery; then both sides of the debate want to prevail through legislation -- either to prohibit stem cell research or to permit stem cell research. Each side sees its position as being driven by a moral imperative -- and therefore not to be compromised without an unacceptable loss of moral integrity...

                      To overcome this contradiction, neutrality is not enough. We need to add a commitment to democratic, constitutional procedures as being the moral trump card when it comes to legislation about areas of conflict based on fundamental disagreements about the right and the good. Essentially this comes down to a second-order commitment that every citizen needs to share: When policy issues arise that lead to profound disagreement among blocs of citizens, the right solution is ... arrived at through legitimate democratic processes. In other words, all citizens need to put their commitment to legitimate democratic procedures ahead of their commitment to a particular conception of the good and the right. Democratic values supersede religious, political, and moral convictions when there is no choice but to legislate an issue. ...

                      Rawls captures this conundrum with the idea of toleration: the idea that citizens must tolerate and respect the strongly-held convictions of their fellow citizens, even while participating in a political process that leads to legislation that is inconsistent with those convictions. This means that if the Alphas prevail through the political process, the Betas need to accept the outcome as morally legitimate -- even though it contradicts their own firmly held moral convictions. But why would one accept the moral necessity of toleration? Doesn't this mean sacrificing one's own moral convictions to the will of a contrary majority? And doesn't this imply that one's own convictions are tentative and conditional?

                      The answer seems to go along something like these lines. When one is a member of a society, one recognizes the inevitable fact of ... fundamental pluralism... The citizen is asked to take a ... perspective ... that there is disagreement about these matters, and the only defensible process for resolving the issue is the democratic process in which each person's reasons count as much as every other person's. ...

                      So -- what is a political liberal, according to Rawls? It seems to boil down to this. It is a moral individual who has his/her own conception of the good...; who recognizes nonetheless that he/she is a member of a polity that is fundamentally plural when it comes to conceptions of the good; who recognizes that there is no basis for insisting on privilege for one's own conception of the good; and who recognizes the moral legitimacy of constitutional democratic procedures when it is necessary to decide among policies that involve conflicting conceptions of the good. It is a person who puts civic commitment to constitutional democratic processes ahead of one's one fundamental convictions when necessary. And it is a person who is fully committed to ensuring the neutrality of the state across fundamental convictions. ...

                      We can now give a fairly simple explication of illiberal thinking as well. It is moral, religious, or political fundamentalism -- the idea that one's own moral convictions are so compelling that no democratic process could legitimately override them. It is the idea that the individual has a persistent right to oppose the state when the state's actions are inconsistent with one's own moral convictions. It is authoritarian -- it endorses the idea that one's own group or party has the right to override the majority's will when the state contradicts one's fundamental convictions. And it is, of course, a position that is fundamentally disrespectful of democracy and of the equal dignity and worth of one's fellow citizens.

                      I think the last paragraph captures what has happened to the political process in the last several decades, particularly on the right. There is a group who believe that their moral convictions stand above the democratic process, and hence they do not honor it. This is the point that Krugman has been trying to make. When one side does not believe the democratic process has the moral authority to resolve fundamental issues, the idea that you can negotiate with the other side in a bipartisan manner within the democratic process is foolhardy. The other side simply will not respect the process. Instead, the opposition will do everything it can to subvert it. We've seen this in action on a variety of issues lately, even in Congress where the need to respect the outcome of the democratic process ought to be well understood.

                      There is no halfway, and there is no resolution once the commitment to the democratic process -- including an agreement to accept and respect the outcome -- has been abandoned. And it isn't just issues like abortion, gay marriage, and religion in the schools where this is happening. The list now includes items such as taxation, health care, and, it seems, the mere election of someone on the other side of the fence.

                      But to me the real question is why so many people have stopped believing that the state has the authority to be the arbiter of last resort in a pluralistic society. Has the process become so captured by wealth and power that people do not trust it to produce an equitable resolution process? To use the term from above, has neutrality been lost? Is it due to a loss of trust in government that can be traced to Vietnam and then Nixon? Has the right's attack on government, particularly since Reagan, been all too successful? I'm not sure I know the answer to this question, but something does seem to have changed.

                        Posted by on Wednesday, January 19, 2011 at 01:17 AM in Economics, Politics | Permalink  Comments (76) 


                        FRBSF Economic Letter: Household Debt and the Weak U.S. Recovery

                        Atif Mian and Amir Sufi contribute to the debate over why the recovery of employment is so slow in this Economic Letter from the San Francisco Fed. They argue that "problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery." (I discussed why recovery is so slow in balance sheet recessions here):

                        Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery, by Atif Mian and Amir Sufi, FRBSF Economic Letter: The U.S. economic recovery has been weak, especially in employment growth. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession.
                        One of the striking features of the U.S. economic downturn that started in 2007 is that it was preceded by the largest increase in household debt in recent history. The thin blue line in Figure 1 plots the ratio of household debt to income for the U.S. economy over time, where income is measured as compensation and wages. After a steady increase from 1950 to 2001, the household debt-to-income ratio skyrocketed from 2001 to 2007 by more than it had in the prior 45 years.

                        Figure 1
                        U.S household debt

                        U.S household debt

                        While housing wealth and stock market gains masked the increase in debt from 2001 to 2006, the subsequent collapse of asset prices led to a tremendous increase in the ratio of total debt to total assets in the U.S. household sector, as shown by the thick red line in Figure 1. The ratio of housing-related debt to housing wealth peaked at 65% in 2009, which was 25 percentage points higher than at any time since 1950. The concurrent household default crisis has been catastrophic. Most analysts agree that household defaults sparked the financial crisis of 2007 and 2008. Our research suggests that a high level of household debt was an important factor underlying the recession (Mian and Sufi 2010).
                        All eyes are now on the economic recovery. By many measures, the nascent recovery is weak, especially in employment. This Economic Letter examines the relationship between the weakness of the current economic recovery and the preceding sharp increase in household leverage ratios. The evidence suggests that high levels of household debt represent an important impediment to growth.

                        Continue reading "FRBSF Economic Letter: Household Debt and the Weak U.S. Recovery" »

                          Posted by on Wednesday, January 19, 2011 at 12:24 AM in Economics, Financial System | Permalink  Comments (22) 


                          Tuesday, January 18, 2011

                          links for 2011-01-18

                            Posted by on Tuesday, January 18, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (30) 


                            "Loss of Reflectivity in the Arctic Doubles Estimate of Climate Models"

                            Global warming is a bigger problem than we thought -- and it was already bigger than we seem to be able to handle:

                            Loss of reflectivity in the Arctic doubles estimate of climate models, EurekAlert: A new analysis of the Northern Hemisphere's "albedo feedback" over a 30-year period concludes that the region's loss of reflectivity due to snow and sea ice decline is more than double what state-of-the-art climate models estimate.
                            The findings are important, researchers say, because they suggest that Arctic warming amplified by the loss of reflectivity could be even more significant than previously thought. ...

                              Posted by on Tuesday, January 18, 2011 at 10:27 AM in Economics, Environment, Science | Permalink  Comments (26) 


                              Barack Obama: Toward a 21st-Century Regulatory System

                              President Obama on regulation:

                              Toward a 21st-Century Regulatory System, by Barak Obama: For two centuries, America's free market has ... been the greatest force for prosperity the world has ever known. ...
                              But throughout our history, one of the reasons the free market has worked is that we have sought the proper balance. We have preserved freedom of commerce while applying those rules and regulations necessary to protect the public against threats to our health and safety and to safeguard people and businesses from abuse.
                              From child labor laws to the Clean Air Act to our most recent strictures against hidden fees and penalties by credit card companies, we have, from time to time, embraced common sense rules of the road that strengthen our country without unduly interfering with the pursuit of progress and the growth of our economy.
                              Sometimes, those rules have gotten out of balance, placing unreasonable burdens on business... At other times, we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis... There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.
                              Over the past two years, the goal of my administration has been to strike the right balance. And today, I am signing an executive order that makes clear that this is the operating principle of our government.
                              This order requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive. ...
                              Where necessary, we won't shy away from addressing obvious gaps: new safety rules for infant formula;... efforts to target chronic violators of workplace safety laws. But we are also making it our mission to root out regulations that conflict, that are not worth the cost, or that are just plain dumb. ...
                              And finally, today I am directing federal agencies to do more to account for—and reduce—the burdens regulations may place on small businesses. ...
                              Despite a lot of heated rhetoric, our efforts over the past two years to modernize our regulations have led to smarter—and in some cases tougher—rules to protect our health, safety and environment. Yet according to current estimates of their economic impact, the benefits of these regulations exceed their costs by billions of dollars. ...
                              Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary. But what is clear is that we can strike the right balance. ...

                              There will now be a rush of lobbyists explaining to Congress and agency heads that the regulations the industries they represent face are excessive and need to be removed. There will be no shortage of effort in this direction. At the same time, a similar effort will be devoted to opposing any new regulation.

                              We need tougher, better regulation in many areas, and I'm sure there's a bad regulation to be found as well. But if the administration is going to move in this direction, it had better be prepared to match the effort it is up against. If it doesn't -- if special interests succeed in swaying the process in their direction -- we"ll end up as far from the "the right "balance" as ever. I hope the administration realizes that this is not an effort it can take lightly with a sweeping proclamation for action that attempts to straddle the political fence. To make this work, the administration will need to do the hard work needed to lead this process forward and guide it to a satisfactory end.

                                Posted by on Tuesday, January 18, 2011 at 12:42 AM in Economics, Politics, Regulation | Permalink  Comments (42) 


                                Having It Both Ways?

                                David Beckworth responds to Tim Duy and Andy Harless:

                                Having My Cake and Eating it Too: Tim Duy and Andy Harless call me out for being critical of the the Fed's low interest rates in the early-to-mid 2000s and for being critical of the Fed for failing to stabilize total current dollar spending. They say I cannot have it both ways. They argue that in order to keep nominal spending stable in the early-to-mid 2000s, the Fed had to push the federal funds rate below its neutral rate level for an extended period. Therefore, it is unfair for me to assign blame to the Fed for the credit and housing boom. Scott Sumner and Bill Woolsey have also raised this question to me in the past. So what do we make of it? Am I being inconsistent?

                                Continue reading "Having It Both Ways?" »

                                  Posted by on Tuesday, January 18, 2011 at 12:24 AM Permalink  Comments (15) 


                                  Monday, January 17, 2011

                                  links for 2011-01-17

                                    Posted by on Monday, January 17, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (38) 


                                    "Zeroing in on Unemployment?"

                                    Arindrajit Dube weighs in on the debate over "zero marginal productivity" workers: 

                                    Zeroing in on Unemployment?, by Arindrajit Dube: Zero is so in these days. At least in the macro-economics blogosphere. So we now have a renewed discussion of “Zero Marginal Product” (ZMP) of labor as an explanation for the persistently high unemployment rate....
                                    I think there is a little bit of “zero envy” going on here — wanting to promote ZMP as an alternative to the “zero lower bound” on interest rates as an explanation of our economic malaise. More importantly, I think the ZMP argument (as it has been made) is fraught with numerous logical difficulties. First, it has been suggested by Tyler Cowen that we can understand ZMP as labor hoarding — in a world where firms don’t actually hoard labor. I think this argument really gets it wrong.  Fundamentally, it confuses firm-level and market-level notions of marginal product.
                                    Labor hoarding occurs when a firm chooses to pay a wage above marginal productivity for a period of time because there are adjustment costs in hiring.  So a worker’s marginal product at a particular firm may be lower than the wage, and yes, in some cases may be zero, though that’s an extreme case. But the operative phrase is at a particular firm. It doesn’t mean that the person’s maximal marginal product (across all possible jobs) is suddenly really small. It just means that (say) Ford might keep a worker around even if production is at 50% of the usual rate because it’s costly for them to let him go and then rehire someone else. If they were to let the new worker go, it’s not the case that her marginal product at her next best alternative job is suddenly zero or really small.
                                    The second — and more fundamental — point is this. The marginal product of labor is not well defined in the presence of aggregate demand externalities. This is almost a tautology, and is true in any New (or old or Post) Keynesian model that I am aware of. The reasons are simple to explain.  Let’s say I’m a restaurateur. I don’t want to hire additional waiters because their marginal product is less than the wage I would have to pay them (whatever it may be — including zero!). However, if other firms (say other restaurants,  grocery stores, department stores, etc.) all hired more people as well, then suddenly the marginal product of that server I was thinking of hiring just rose. And I might just hire her. This is the fundamental point in any model with aggregate demand externalities.
                                    I wrote a short paper 14 years ago (with Ethan Kaplan) on how such externalities may shape labor supply decisions and worker discouragement in the presence of heterogeneous labor. We showed how, in the presence of demand externalities, a wage subsidy (such as the Earned Income Tax Credit) financed by a tax on profits can be Pareto improving by encouraging the employment of workers who otherwise might (inefficiently) stay out of the labor market. In light of the healthy profits earned by US corporations these days, it is particularly useful to think about employment-friendly policies financed by profits. And the reason for that is not limited to “populist” sensibilities. There are “hard headed” rationales based on the desire to make our economy work better.
                                    But don’t take my word for it — the entire two-volume set of New Keynesian Economics is full of papers that imply that the marginal product of labor is a function of aggregate demand. Take as an example “Imperfect Competition and the Keynesian Cross” by N. Gregory Mankiw. Or “Monopolistic Competition and the Effects of Aggregate Demand” by Olivier Jean Blanchard and Nobuhiro Kiyotaki. So that makes me wonder — what’s the real explanatory power of the ZMP argument, when well-argued explanations show that the marginal product depends on fiscal and monetary policies?
                                    I think the question of why we are seeing high and persistent unemployment is terribly important. And we should welcome explanations of all sorts as we try to figure out the answers. However, I don’t see an appeal to zero marginal product of labor a particularly enlightening explanation for our troubles.

                                    My explanation is here (and, from a year or so ago, here, though I have backed away from the labor hoarding explanation more recently. In 2008, I was worried this would happen and that policymakers were not taking the steps needed to address the problem -- see here.)

                                      Posted by on Monday, January 17, 2011 at 10:16 AM in Economics, Unemployment | Permalink  Comments (31) 


                                      Paul Krugman: The War on Logic

                                      What's really behind the GOP's opposition to health care reform?:

                                      The War on Logic, by Paul Krugman, Commentary, NY Times: ...We are, I believe, witnessing something new in American politics..., the G.O.P. ... war on logic.
                                      So, about that...: this week the House is expected to pass H.R. 2, the Repealing the Job-Killing Health Care Law Act — its actual name. But Republicans have a small problem: they claim to care about budget deficits, yet the Congressional Budget Office says that repealing last year’s health reform would increase the deficit. So what, other than dismissing the nonpartisan budget office’s verdict as “their opinion” — as Mr. Boehner has — can the G.O.P. do?
                                      The answer is contained in an ... “analysis” ... released by the speaker’s office, which purports to show that health care reform actually increases the deficit. Why? That’s where the war on logic comes in.
                                      First of all, says the analysis, the true cost of reform includes the cost of the “doc fix.” What’s that?
                                      Well, in 1997 Congress enacted a formula to determine Medicare payments to physicians. The formula was, however, flawed; it would lead to payments so low that doctors would stop accepting Medicare patients. Instead of changing the formula, however, Congress has consistently enacted one-year fixes. And Republicans claim that the estimated cost of future fixes, $208 billion over the next 10 years, should be considered a cost of health care reform. But the same spending would still be necessary if we were to undo reform. ...
                                      There’s more like that: the G.O.P. also claims that $115 billion of other health care spending should be charged to health reform, even though the budget office has tried to explain that most of this spending would have taken place even without reform.
                                      To be sure, the Republican analysis doesn’t rely entirely on spurious attributions of cost — it also relies on using three-card monte tricks to make money disappear. Health reform, says the budget office, will increase Social Security revenues and reduce Medicare costs. But the G.O.P. analysis says that these sums don’t count, because some people have said that these savings would also extend the life of these programs’ trust funds, so counting these savings as deficit reduction would be “double-counting,” because — well, actually it doesn’t make any sense, but it sounds impressive. ...
                                      The key to understanding the G.O.P. analysis of health reform is that the party’s leaders are not, in fact, opposed to reform because they believe it will increase the deficit. Nor are they opposed because they seriously believe that it will be “job-killing” (which it won’t be). ... As I tried to explain in my last column, the modern G.O.P. has been taken over by an ideology in which the suffering of the unfortunate isn’t a proper concern of government, and alleviating that suffering at taxpayer expense is immoral, never mind how little it costs.
                                      Given that their minds were made up from the beginning, top Republicans weren’t interested in and didn’t need any real policy analysis — in fact, they’re basically contemptuous of such analysis, something that shines through in their health care report. All they ever needed or wanted were some numbers and charts to wave at the press, fooling some people into believing that we’re having some kind of rational discussion. We aren’t.

                                        Posted by on Monday, January 17, 2011 at 12:35 AM in Economics, Health Care | Permalink  Comments (120) 


                                        Sunday, January 16, 2011

                                        links for 2011-01-16

                                          Posted by on Sunday, January 16, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (12) 


                                          Response to "Was Adam Smith Wrong on Rising Real Wages And the Spread of 'Opulence'?"

                                          Yesterday, I reposted Gavin Kennedy's response to Jeff Weintraub's comments on Adam Smith. Via email, here is Jeff Weintraub's counter-response (the email was sent to Gavin Kennedy and cc'ed to me -- I asked if it was okay to post):

                                          Dear Gavin Kennedy,
                                          I just happened to notice your two-part response to my blog post about the theoretical puzzle posed by Adam Smith's theory of wages and "universal opulence":

                                          (Most of your second post was then re-posted, with a bit of further commentary, by Mark Thoma in his Economist's View blog... and someone forwarded that to me.)

                                          I appreciate the friendly and gracious character of your response to my post, which includes many interesting and intelligent points.

                                          Continue reading "Response to "Was Adam Smith Wrong on Rising Real Wages And the Spread of 'Opulence'?"" »

                                            Posted by on Sunday, January 16, 2011 at 02:34 PM in Economics, History of Thought | Permalink  Comments (16) 


                                            Fed Watch: Housing and the Fed in 2005

                                            Tim Duy:

                                            Housing and the Fed in 2005, by Tim Duy: The Federal Reserve released the 2005 FOMC transcripts this week. Attention quickly turned to the Fed's view of the growing housing bubble. Calculated Risk finds some very prescient warnings from then Atlanta Fed President Jack Guynn, who describes housing as an "accident waiting to happen." Bloomberg continues with the obvious path of criticism:

                                            Federal Reserve staff and policy makers identified a housing bubble in 2005 and failed to alter a predictable path of interest-rate increases to slow down the expansion of mortgage credit, transcripts from Open Market Committee meetings that year show.

                                            Led by then-Chairman Alan Greenspan, the FOMC raised the benchmark lending rate in quarter-point increments to 4.25 percent from 2.25 percent at the end of December 2004. The committee also removed uncertainty about the pace of rate increases by telegraphing that future moves would be “measured” in every statement.

                                            The “measured” pace language helped fuel the housing boom by keeping longer-term interest rates low and was inappropriate at the time given the uncertainties about both inflation and asset prices, said Marvin Goodfriend, a professor at Carnegie Mellon University in Pittsburgh.

                                            “It was a major mistake of the Fed,” said Goodfriend, who attended some of the 2005 meetings as a policy adviser to the Richmond Fed. “It gave markets a sense that the Fed was on top of everything to a degree that wasn’t the case. It gave the impression that this was a mechanical adjustment to normality. The market was overconfident.”

                                            David Beckworth follows up:

                                            With the release of the 2005 FOMC transcripts we learn that the Fed was aware of the housing boom but failed to alter monetary policy. Among other damning evidence, we find this gem in the December 2005 FOMC meeting. It shows the real federal funds rate compared to the Fed's estimate of the equilrium or neutral real federal funds. There is a striking gap that emerges during the early-to-mid 2000s. This indicates the Fed was highly accommodative and aware of it.

                                            The problem with this criticism is that it fails to capture the implications of the low interest rate environment for the economy at large. Andy Harless, in a response to Beckworth, beats me to the punch:

                                            I just don't get how this Fed-too-easy story is consistent with the data on NGDP growth. From 2001 to 2006, NGDP grew at an annual rate of 5.3%. That's actually slightly slower than the prior 5 year period (5.4%) or the 5 years before that (also 5.4%). If the Fed was too easy in 2002-2003, then that period should have been followed by a huge boom in NGDP. It wasn't. All that happened was that NGDP grew (almost) fast enough (about 6% annually) to make up for the slow growth during the recession and the year of weak recovery that followed. As far as I can tell, the data vindicate the judgment of Fed officials who ignored the model-based estimates.

                                            Looking back at the path of nominal GDP over the last decade:

                                            Fredgraph[2]

                                            Considering the path of employment, output, and prices, I have difficulty arguing that the level of rates was significantly wrong. I tend to think that regulatory failure was the primary Fed error - if the Fed realized the housing market was evolving into a bubble, shouldn't they have been more focused on the kind of mortgage lending that was taking place? Shouldn't, in their jobs as banking regulators, made more aggressively us of stress tests before housing prices began to melt? More directly, from a regulatory perspective, the Fed simply lost view of its societal function. Via Rajiv Sethi:

                                            But even in our very imperfect world, might we not have been able to stabilize output and employment by returning quickly and forcefully to the original mandate of the Federal Reserve, to channel credit preferentially to productive uses?

                                            The Fed was probably too captured by a free markets ideology to seriously question the wisdom of channeling so much capital into housing, which was really less about capital investment and more about consumption. And, in their defense, attempting to direct capital flows is indeed tricky business fraught with peril. But allowing everybody and their cousin to get a half million dollar mortgage with no income documentation? Addressing that issue seems like it should have been doable.

                                            Still, rather than lay all the blame at the feet of monetary policymakers, I think the real question we still need to resolve is more fundamental. Turning the question around, why did the US economy struggle so dramatically this decade that the Fed was pushed into a very low interest rate environment? The jobs record is simply unprecedented - a decade with no job growth. To what extent are domestic policymakers to blame? And was it domestic policy at all? I don't recall the 1970's as a policy paradise, but at least jobs were created over that decade. Answers will vary; mine is that US policymakers across the ideological spectrum allowed and even supported the pursuit of foreign nations' mercantilist policies on a unprecedented scale, thereby distorting global patterns of production and consumption in a way that fundamentally hobbled the US economy. If this is true, how can we chart a path back?

                                            In short, I think we need to understand why the last decade was jobless - it is tempting to blame the Fed, but the story is likely deeper. Until we do, I don't think I can definitively say the next decade will be any different.

                                              Posted by on Sunday, January 16, 2011 at 11:43 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (14) 


                                              A Rising "Military-Industrial Complex"

                                              As we look for ways to cut the budget, defense spending needs more scrutiny that it is getting:

                                              50 years later, we're still ignoring Ike's warning, by Susan Eisenhower, Commentary, Washington Post: I've always found it rather haunting to watch old footage of my grandfather, Dwight Eisenhower, giving his televised farewell address to the nation on Jan. 17, 1961. ...
                                              Of course, the speech will forever be remembered for Eisenhower's concerns about a rising "military-industrial complex," which he described as "a permanent armaments industry of vast proportions" with the potential to acquire - whether sought or unsought - "unwarranted influence" in the halls of government. ...
                                              Looking back, it is easy to see the parallels to our era, especially how the complex has expanded since Sept. 11, 2001. In less than 10 years, our military and security expenditures have increased by 119 percent. Even after subtracting the costs of the wars in Iraq and Afghanistan, the budget has grown by 68 percent since 2001. In 2010, the United States is projected to spend at least $700 billion on its defense and security, the most, in real terms, that we've spent in any year since World War II.
                                              However, at this time of increased concerns over our fiscal deficit and the national debt, Eisenhower's farewell words and legacy take on added significance.
                                              Throughout his presidency, Eisenhower continually connected the country's security to its economic strength, underscoring that our fiscal health and our military might are equal pillars of our national defense. This meant that a responsible government would have to make hard choices. The question Eisenhower continued to pose about defense spending was clear and practical: How much is enough? ...

                                                Posted by on Sunday, January 16, 2011 at 10:17 AM in Budget Deficit, Economics | Permalink  Comments (42) 


                                                Saturday, January 15, 2011

                                                links for 2011-01-15

                                                  Posted by on Saturday, January 15, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (42) 


                                                  Romer: What Obama Should Say About the Deficit

                                                  Christina Romer on President Obama's upcoming State of the Union address:

                                                  What Obama Should Say About the Deficit, by Christina Romer, Commentary, NY Times: ...My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit. ... The need for such a bold plan is urgent — both politically and economically. ...
                                                  So what should the president say and do? First, he should make clear that the issue is spending and taxes over the coming decades, not spending in 2011. Republicans ... have pledged to cut nonmilitary, non-entitlement spending in 2011... Such a step would do nothing to address the fundamental drivers of the budget problem, and would weaken the economy...
                                                  Instead, the president should outline major cuts in spending that would go into effect over the next few decades, and that he wants to sign into law in 2011. ...
                                                  President Obama needs to explain that ... there is no way to solve our budget problem without shared sacrifice. At the same time, he should ... ensure that spending cuts not fall on the disadvantaged.
                                                  Finally, the president has to be frank about the need for more tax revenue. ... The only realistic way to close the gap is by raising revenue. ...Congressional Republicans will have to come to terms with this fact...
                                                  None of these changes should be immediate. With unemployment at 9.4 percent and the economy constrained by lack of demand, it would be heartless and counterproductive to move to fiscal austerity in 2011. ... But legislation that gradually and persistently trims the deficit would not harm the economy today. ...

                                                  For me, Social Security is the wild card in all of this. Though it's far from the major underlying casue of the budget problem -- the recent agreement to extend tax cuts has a bigger impact on the budget than the projected Social Security shortfall (see here) -- it's an easy target. In a part of the article I left out, there is talk of "thoughtful ways to slow the growth of Social Security spending. Worries about where that will lead make me wary of getting behind these efforts.

                                                    Posted by on Saturday, January 15, 2011 at 03:42 PM in Budget Deficit, Economics, Politics | Permalink  Comments (30) 


                                                    "Was Adam Smith Wrong on Rising Real Wages And the Spread of Opulence?"

                                                    Around Adam Smith's time, and even more so in the 1800s, the question of the long run fate of capitalism was much debated. There were, primarily, two imagined outcomes far into the future, one where everyone lived in opulence with ample time for leisure, and the other characterized by widespread misery, a stationary state where productivity gains have been exhausted and population has grown until there are barely enough resources to support its existence. The second, "dismal" outcome was the most common long-run prediction for capitalism.

                                                    Today, we hear the same questions and the same debate, particularly as we see wages stagnating for the last several decades. Is this the beginning of a long-run trend toward stagnation, or a temporary blip on the march of technology and progress that will, eventually, help us all? (And there is also the worry that robots will replace humans, the latest of a long history of worries that machines will render humans relatively useless.)

                                                    Gavin Kennedy corrects some misperceptions about Adam Smith's views on this topic, in particular what constitutes a subsistence wage and whether it is defined by biology or society:

                                                    Was Adam Smith Wrong on Rising Real Wages And the Spread of Opulence?, Adam Smith's Lost Legacy: Jeff Weintraub, a professor at the Universities of Pennsylvania and Haifa, opens a helpful discussion on a “theoretical conundrum” that two of his (undoubtedly bright) students raised with him about Adam Smith’s “optimism” on the market raising real wages among the poor as an outcome of “progress towards opulence” (here: “Adam Smith on poverty, progress, wages, and "universal opulence" — A theoretical conundrum”).

                                                    Jeff Weintraub directs his responses at the apparent ‘conundrum’ raised by his students, Daniel Albornoz and David Kanter. [However, his longer postscript reports on David Ricardo’s views on the same issues and Ricardo always tends to obfuscate Smith’s meaning, IMHO]:

                                                    Continue reading ""Was Adam Smith Wrong on Rising Real Wages And the Spread of Opulence?"" »

                                                      Posted by on Saturday, January 15, 2011 at 11:43 AM Permalink  Comments (14) 


                                                      "A Refusal to Take Yes for an Answer"

                                                      Dear Raghu Rajan:

                                                      It is not much of a correction to say I was wrong to assert that structural unemployment for the US is around 3 percent, but now that I've looked again it's around 3 percent. You did correct the misstatement of Erik Hurst's work, but you refuse to correct the faulty misinterpretations that followed from the error. Instead, you have thrown together a few figures, issued a "caution that there are large errors" and reasserted the 3% figure (okay, 2.5 percent this time, but you do say "Perhaps my misstated conclusion from Erik’s work of “up to 3 percentage points” is not terribly off the mark"). Apparently you already know the answer, the unemployment problem is structural not cyclical -- it's not an aggregate demand problem -- and it's simply a matter of using highly unreliable extrapolations to justify the truth you believe is out there.

                                                      This is from a slightly different context, but "all the efforts to insist that it can’t be aggregate demand amount to a refusal to take yes for an answer." There are many, many estimates of the degree to which structural unemployment is a problem, e.g. this one from the SF Fed, that do not come to the conclusion you arrive at. This work points a finger at a large cyclical (AD) problem. But instead of citing numbers that have been thoroughly vetted, which I assume you must know about, you rely instead upon your own rough calculations surrounded by warnings about their accuracy, and then say you hope that Hurst's future work will end up supporting what you think must be true ("Erik has promised to come up with careful estimates that should be much more accurate"). That sure does seem like "a refusal to take yes for an answer." Why present your "guesstimates" when better work is available? (To be fair there are a range of estimates, but my reading is that overall they point strongly to the cyclical issue. In any case, citing back of the envelope calculations that support preconceptions while competely ignoring real work that does not is not the way those who are the first to claim economics should be more scientific ought to proceed.)

                                                      This wouldn't be of much importance if the error simply reflected upon your own reputation. But there are millions of people who still need new jobs, and to the extent that the refusal to acknowledge the demand side of the problem holds back efforts to help these people find jobs, the consequences for them are far from trivial.

                                                        Posted by on Saturday, January 15, 2011 at 09:45 AM in Economics, Unemployment | Permalink  Comments (45) 


                                                        Friday, January 14, 2011

                                                        links for 2011-01-14

                                                          Posted by on Friday, January 14, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (35) 


                                                          Fed Watch: A Mixed Bag of Data

                                                          Tim Duy:

                                                          A Mixed Bag of Data, by Tim Duy: Today's data flow suggests ongoing expansion, but should also send a note of caution. Industrial activity continues to respond to firming demand, but capacity has yet to show solid gains. Firms are still not sufficiently confident, or lack sufficient demand, to justify widespread investment. Similarly, consumer spending continues along its upward trend, although the increase in energy costs are likely constraining the pace of that growth and keeping a lid on consumer confidence. Something of a mixed bag largely consistent with the general consensus view.

                                                          Start with the better than expected industrial production report, via Bloomberg:

                                                          Industrial production in the U.S. rose in December more than forecast, boosted by gains in business equipment and home electronics that indicate factories remain at the forefront of the recovery as the new year begins.

                                                          Output at factories, mines and utilities climbed 0.8 percent, the most in five months, after a revised 0.3 percent increase in November, figures from the Federal Reserve showed today in Washington. Economists forecast a 0.5 percent gain, according to the median of 82 projections in a Bloomberg News survey. Manufacturing climbed 0.4 percent, and utility output increased 4.3 percent as snowstorms swept parts of the nation.

                                                          I have taken to looking at the capacity data for signs of a solid, self-sustaining recovery. Here we see the most tentative signs of improvement, or at least stabilization:

                                                          FW0114115

                                                          Looking back at the decade, capacity gains really took hold in late-2004 as the economy finally shook off the post tech-bubble doldrums on the back of the building housing bubble:

                                                          FW0114111

                                                          Before one gets too excited at the possibility, we can take a look back at the pace of progress during the 1990s.

                                                          FW0114112

                                                          We should be hoping for a recovery more like the 1990s than the 2000s, but it is challenging to find a story that allows for that kind of growth. I am not even sure how we get the recovery of the 2000s without an asset price bubble.

                                                          Moving on to retail sales, the numbers fell short of the outsized expectations that developed in the run up to the Christmas season. Still, the overall trend looks intact:

                                                          FW0114114

                                                          That said, I think you get a cleaner picture of underlying consumer trends by stripping out auto related sales:

                                                          FW0114113

                                                          Here the rebound looks less impressive, but the trend remains in the right direction. That said, there was a noticeable decline in the rate of monthly growth during the final quarter, 0.77%, 0.59%, and 0.36% for October, November, and December, respectively. I think it is safe to say that the consumer has some momentum, especially with rising nonfarm payrolls, but higher energy prices are likely to constrain the pace of growth going forward.

                                                          Similarly, rising energy costs were a culprit behind the decline in consumer confidence. And those higher costs clearly showed up in the consumer price index. Bloomberg has a curious introduction:

                                                          The cost of living in the U.S. climbed more than forecast in December, led by higher fuel and food prices, while other goods and services showed the smallest annual increase on record.

                                                          Looking at the the CPI release, one gets something of a different story:

                                                          The energy index increased in December. The gasoline index rose sharply and accounted for about 80 percent of the all items seasonally adjusted increase. The household energy index, which declined in November, increased as well. The food index increased slightly in December, with the fruits and vegetables index rising notably.

                                                          The headline increase was driven by energy, not food as Bloomberg reports. Core prices increased just 0.1% for the month and 0.8% compared to last year. So far, higher energy/commodity prices have yet to work their way through to final prices, not surprising given persistently weak labor markets and consistent with the Beige Book story.

                                                          Finally, Richmond Fed President Jeffrey Lacker offered up the possibility of reviewing the large scale asset purchases:

                                                          “While the outlook may not have improved enough yet to warrant adjusting our purchase plans in the near-term, I anticipate earnest re-evaluation as economic developments unfold in the months ahead,” Lacker said today in prepared remarks of a speech in Richmond, Virginia.

                                                          I am not surprised that some policymakers would point to better data as a reason to reevaluate the program. But I would think about the timeline on this. Lacker says describes the process in the months ahead. But how many months do we have left? The current program is expected to end by the second quarter of this year, just about 5 months. Unless growth explodes, by the time FOMC members would feel comfortable disrupting the plan, it will be almost complete anyway. Even other traditionally hawkish policymakers expect the plan to concluded as planned.

                                                          Bottom Line: Data generally in line with a sustainable growth, but expectations that the economy is about to take off remain premature. Inflation fears still appear overblown given that inability to pass higher commodity prices through to consumers. Energy prices, however, do appear to be constraining consumer spending. Overall better data will continue to be reflected in Fedspeak, but time is running short to change the current asset purchase program.

                                                            Posted by on Friday, January 14, 2011 at 01:26 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (15) 


                                                            Capacity Utilization and Unemployment

                                                            According to the latest data released by the Fed, both capacity utilization and industrial production increased in December:

                                                            Industrial production increased 0.8 percent in December after having risen 0.3 percent in November. ... At 94.9 percent of its 2007 average, total industrial production in December was 5.9 percent above its level of a year earlier. The capacity utilization rate for total industry rose to 76.0 percent, a rate 4.6 percentage points below its average from 1972 to 2009.

                                                            I had graphed the relationship between unemployment and capacity utilization in the past, and there was a fairly close relationship between the two series, so I was about to write that this is good news for unemployment. But when I updated the graph with the latest data, the relationship appears to have broken down to some degree:

                                                            Capacity-vs-unemp

                                                            Why has the relationship changed, i.e. why are GDP and industrial production recovering faster than unemployment, and why has this relationship changed over time? I wrote this in response to that question for a "Room for Debate" at the NY Times, but it got bumped due to the events in Arizona and I don't know if it will run:

                                                            The outlook for the economy has improved a bit recently, but we still have a lot of ground to make up – millions of workers who lost jobs during the recession are still in need of employment – and it will take quite of bit of time to close the gap.  Thus, I am still expecting a slow recovery for output and an even slower recovery for employment.

                                                            Why will the recovery of employment take even longer than the recovery of output? A combination of factors is at work.  First, firms do not want to make a commitment to hiring new workers until they are sure the recovery is solid, and uncertainty about the strength of the recovery near turning points leads firms to delay in hiring new workers.

                                                            Second, during a downturn it's natural to reorganize production.  As firms lay workers off, they reassign tasks to the workers who remain. Then, as things improve they install labor saving equipment in an attempt to cut costs.  This reassignment of tasks and the replacement of labor with software, robots, and other machinery lead to a delay in the recovery of employment.

                                                            The third reason for a delay is that firms do not want to let their highest productivity workers, or workers that require costly training, go in a recession even if there's not enough work for them to do.  Since these firms will not hire new workers until this excess capacity is used up, this also delays the time until new workers are hired.

                                                            Fourth, when there is a considerable amount of structural change – leading to large numbers of workers who must be retrained and/or relocated as they move out of industries such as housing and finance – labor markets will have difficulty recovering.

                                                            I hope I am wrong, but I believe these factors will interact to produce an extended period of unemployment. Historically, financial meltdowns of the type we experienced are difficult to recover from and this creates considerable uncertainty. Thus, the first factor listed above is particularly strong. The second factor is likely to be strong as well since firms will take advantage of expanded opportunities created by technological advances to improve productivity. Furthermore, this recession has induced a large amount of structural change in addition to the usual cyclical problems making the fourth factor much stronger than in a typical recession.

                                                            What about the longer run? Will the troubles for labor end when the recession is over? Unfortunately, the answer is no.  Labor markets have experienced tumultuous change in recent decades due to globalization and technological change, and these forces will still be there after the recession ends.

                                                            [Alternative explanations are welcome. Also posted at MoneyWatch.]

                                                              Posted by on Friday, January 14, 2011 at 09:36 AM Permalink  Comments (32) 


                                                              Paul Krugman: A Tale of Two Moralities

                                                              Sometimes, there is no middle ground:

                                                              A Tale of Two Moralities, by Paul Krugman, Commentary, NY Times: On Wednesday, President Obama called on Americans to “expand our moral imaginations, to listen to each other more carefully, to sharpen our instincts for empathy, and remind ourselves of all the ways our hopes and dreams are bound together.” Those were beautiful words; they spoke to our desire for reconciliation.
                                                              But the truth is that we are a deeply divided nation and are likely to remain one for a long time. ... For the great divide in our politics isn’t really about pragmatic issues, about which policies work best; it’s about differences in those very moral imaginations Mr. Obama urges us to expand, about divergent beliefs over what constitutes justice. ...
                                                              One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.
                                                              The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.
                                                              There’s no middle ground between these views. ... Today’s G.O.P. sees much of what the modern federal government does as illegitimate; today’s Democratic Party does not. When people talk about partisan differences, they often seem to be implying that these differences are petty, matters that could be resolved with a bit of good will. But what we’re talking about here is a fundamental disagreement about the proper role of government...
                                                              In a way, politics as a whole now resembles the longstanding politics of abortion — a subject that puts fundamental values at odds, in which each side believes that the other side is morally in the wrong. Almost 38 years have passed since Roe v. Wade, and this dispute is no closer to resolution.
                                                              Yet we have, for the most part, managed to agree on certain ground rules in the abortion controversy: it’s acceptable to express your opinion and to criticize the other side, but it’s not acceptable either to engage in violence or to encourage others to do so.
                                                              What we need now is an extension of those ground rules to the wider national debate.
                                                              Right now, each side ... passionately believes that the other side is wrong. And it’s all right for them to say that. What’s not acceptable is the kind of violence and eliminationist rhetoric encouraging violence that has become all too common these past two years.
                                                              It’s not enough to appeal to the better angels of our nature. We need to have leaders of both parties — or Mr. Obama alone if necessary — declare that both violence and any language hinting at the acceptability of violence are out of bounds. We all want reconciliation, but the road to that goal begins with an agreement that our differences will be settled by the rule of law.

                                                                Posted by on Friday, January 14, 2011 at 12:27 AM in Economics, Politics | Permalink  Comments (140) 


                                                                Fed Watch: Shifting to Autopilot

                                                                Tim Duy:

                                                                Shifting to Autopilot, by Tim Duy: Incoming data this week suggest the US economy continues to meander on its upward path, albeit at a rate that is decisively lackluster, at least relative to the magnitude of the output gap. That path of growth guarantees the Fed completes the current large scale asset purchase program. But soon we will have to turn our attention to what comes next. The baseline scenario is that the Fed holds pat - holding the balance sheet steady for the remainder of 2011, a scenario endorsed by at least two policymakers this week. Still, we should continue to challenge this assumption. Considering the expected slow improvement in labor markets and tame inflation, will the Fed consider extending asset purchases beyond the most recent $600 billion? Probably not.

                                                                Thursday we saw some reminders that the path to recovery is not a straight line. First, initial unemployment claims retraced some of the recent declines. Mark Thoma has the story here. To be sure, given the noise in this series, one week of data contains limited information. In general, the downward trend remains intact. Still, it argues against expectations the job market is set to rocket forward.

                                                                Housing news continues to tell the same old story. The record level of foreclosures in 2010 is not expected to be a record for long, while more evidence collects that housing prices are still falling. That said, housing is an old story. Nothing to see here folks, please move along.

                                                                More importantly, the trade data also was not as supportive as one could hope. While the nominal deficit improved in November, the real deficit deteriorated slightly in contrast to October's significant improvement. Still, barring a surprise deterioration in December, the external accounts should contribute positively to 4Q10 growth. To be sure, this adds to the positive momentum heading into 2011, but one quarter is not enough to break the general downward trend of 2010. The combination of high unemployment and a lack of clear direction on rebalancing of global activity promises to keep the threat of global trade wars alive. US Treasury Secretary Timothy Geithner rattled the sabers this week to keep pressure on his Chinese counterparts. From the Wall Street Journal:

                                                                "We are willing to make progress" on issues of interest to China, Mr. Geithner said at Johns Hopkins University's School for Advanced International Studies, "but our ability to move on these issues will depend on how much progress we see from China," including a faster appreciation of the Chinese currency.

                                                                To be sure, I question whether Geithner is truly committed to global rebalancing. A reminder from Bloomberg:

                                                                U.S. Treasury Secretary Timothy F. Geithner said he has continued to support the strong dollar policy he helped craft in the Clinton administration when he worked for his predecessor Robert Rubin.

                                                                “That particular phrase and commitment of policy was first written in my office at the Treasury Department in 1995,” Geithner said today, when asked about the currency during a Senate Finance Committee hearing.

                                                                Sorry, don't mean to be skeptical, but I am sensing mixed messages. The resolution, of course, is that the appropriate policy direction is one of managed exchange rate depreciation - no sudden stops of capital, please. On this point, Geithner talks a good game:

                                                                Geithner said he agreed that the U.S. needs to show commitment to lowering its deficits over time, to avoid losing the confidence of investors around the world. That could hurt the economy, raise interest rates and reduce investment, the Treasury chief said.

                                                                “If we do not make people believe that we are going to fix those deficits, bring them down over time, then we will risk losing confidence in our financial future,” Geithner said.

                                                                Something of a Catch-22, I fear. Sustaining confidence in US markets means resolving long term US fiscal issues, but there is no pressing reason to address those issues in the absence of a loss of confidence.

                                                                Ultimately, I fear that should the Dollar fall enough to provide a significant boost to the US economy, it will also be enough to rattle Wall Street. I hate to say it, but I suspect should that point be reached, Washington will choose Wall Street over Main Street. Pessimist or realist? Of course, the ongoing European crisis suggests this is not a problem anything soon, as the uncertainty helps prop up the Dollar. I imagine US policymakers are in an uncomfortable place (or at least should be) on that topic. They probably want to see the Euro remain intact, rather than risk the impact of a rapidly appreciating Dollar. Of course, that means forcing a debt-deflation spiral on the periphery nations. Doesn't seem quite right.

                                                                Warts aside, forecasters continue to upgrade their expectations for US growth. From the Wall Street Journal:

                                                                Economists have steadily grown more upbeat about growth in recent months and boosted their estimates for the fourth quarter of 2010 in this survey. On average, respondents now estimate the U.S. grew 3.3% at a seasonally adjusted annual rate in the fourth quarter—up from an estimate last month of 2.6% growth. The economy grew 2.6% in the third quarter.

                                                                Amid the stronger growth forecasts, economists now expect the U.S. to generate nearly 180,000 jobs a month on average this year, significantly more than last year's average of 94,000. But with continued population growth, that isn't nearly enough to quickly bring down the unemployment rate, now at 9.4%. By the end of 2011, the economists, on average, expect the jobless rate to be 8.8%.

                                                                Federal Reserve Chairman Ben Bernanke shares a similar view:

                                                                “We see the economy strengthening,” Bernanke said as part of a panel discussion on boosting lending to small businesses. “It looks better in the last few months. We think that a 3 to 4 percent-type of growth number for 2011 seems reasonable.”

                                                                “Now you’re not going to reduce unemployment at the pace that we’d like it to,” Bernanke said. “But certainly it would be good to see the economy growing. That means more sales, more business for companies of all sizes.”

                                                                So, let's establish 3 to 4% as the Bernanke Baseline, which would be above trend growth, but, as Bernanke reiterates, still imply painfully slow improvements in the unemployment rate. Still, above trend it is, and that suggests to me that extending the current asset purchase program would meet a great deal of internal resistance. True to form, Dallas Federal Reserve President Richard Fischer, now a voting member of the FOMC, appears opposed to additional action:

                                                                The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we have reached our limit. I would be wary of further expanding our balance sheet. But here is the essential fact I want to emphasize today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place...

                                                                ...the key to correcting the underperformance of the American economy and American job creation does not rest with the Federal Reserve. It is in the hands of those who make fiscal and regulatory policy.

                                                                The Fed has reduced the cost of business borrowing to the lowest levels in decades. It has seen to it that liquidity is widely available to banks and businesses. It has kept the economy from deflating and it has kept inflation under control. This has helped raise the economic tide. Recent data make clear that the risks of a double-dip recession and deflation have ebbed and that economic growth and job creation are beginning to flow…

                                                                I don’t believe this has much to do with the Fed. None of my business contacts, large or small, publicly held or private, are complaining about the cost of borrowing, the lack of liquidity or the availability of capital. All express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation. All are stymied by a Congress and an executive branch that have appeared to them to be unaware of, if not outright opposed to, what fires the entrepreneurial spirit. Many have begun to feel that opportunities for earning a better and more secure return on investment are larger elsewhere than here at home.

                                                                Colorful, as always. I have to admit enjoying Fischer's speeches, at least for their entertainment value. Still, he is not immediately worried about inflation:

                                                                The policy maker said he saw some evidence that firms are trying to push through price increases, and added commodity prices are on the rise mostly on strong global demand factors. But he also allowed that the Fed’s easy money policy may be contributing to some of the gains. That said, Fisher is not worried about inflation, saying “I don’t see inflation presently” or in the “immediately foreseeable future.” Instead, policy makers’ problem “is getting the economy moving again.”

                                                                No time to halt current policy. This repeats the story of the Beige Book:

                                                                Most District reports mentioned increasing prevalence of cost pressures but only modest pass-through into final prices because of competitive pressures.

                                                                Pushing through hirer prices remains a challenge. Another FOMC member who spoke up on the asset purchase program was now voting member Philadelphia Fed President Charles Plosser:

                                                                Charles Plosser, president of the Federal Reserve Bank of Philadelphia, was the latest to signal a desire for continuity from the Fed, even though he is highly skeptical of the program's effectiveness. "I wish we hadn't done it, but that doesn't mean I want to stop it right now," Mr. Plosser said in an interview with The Wall Street Journal...

                                                                ...In a separate interview with The Wall Street Journal, Mr. Fisher said, "I would not have voted for QE2 had I been a voting member" last year.

                                                                Neither Fischer nor Plosser would be willing to call an end to the current program, but with growth above trend, both would likely dig in their heals against additional action. I don't think they would be alone. Remember, the Fed was hesitant to act further last summer, clinging to forecasts of solid growth. It was only the mid-year slowdown and its threat of a double-dip that pushed them into action. If Bernanke's current forecast is realized, it is difficult to see where the support would come from to prompt another round of easing.

                                                                Bottom Line: The data still is not perfectly clean. That said, forecasts for 2011 are firming, both within and outside the Fed, and pointing toward above trend growth. Nothing spectacular, to be sure, which will keep up the pressure on the Administration to address high unemployment. That promises continued verbal support of external rebalancing from Treasury. On the monetary front, Bernanke will have plenty of support to continue the current policy, but the FOMC will be wary about further easing. At the same time, the current constellation of growth, inflation, and unemployment rates argues against any tightening in the near term. Policy is thus likely to shift to autopilot.

                                                                  Posted by on Friday, January 14, 2011 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (6) 


                                                                  Thursday, January 13, 2011

                                                                  links for 2011-01-13

                                                                    Posted by on Thursday, January 13, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (10) 


                                                                    Brain Images Predict Video Game Performance

                                                                    A between classes quickie:

                                                                    Researchers can predict your video game aptitude by imaging your brain, EurekAlert: Researchers report that they can predict "with unprecedented accuracy" how well you will do on a complex task such as a strategic video game simply by analyzing activity in a specific region of your brain.
                                                                    The findings, published in the online journal PLoS ONE, offer detailed insights into the brain structures that facilitate learning, and may lead to the development of training strategies tailored to individual strengths and weaknesses.
                                                                    The new approach used established brain imaging techniques in a new way. Instead of measuring how brain activity differs before and after subjects learn a complex task, the researchers analyzed background activity in the basal ganglia, a group of brain structures known to be important for procedural learning, coordinated movement and feelings of reward.
                                                                    Using magnetic resonance imaging and a method known as multivoxel pattern analysis, the researchers found significant differences in patterns of a particular type of MRI signal, called T2*, in the basal ganglia of study subjects. These differences enabled researchers to predict between 55 and 68 percent of the variance (differences in performance) among the 34 people who later learned to play the game.
                                                                    "There are many, many studies, hundreds perhaps, in which psychometricians, people who do the quantitative analysis of learning, try to predict from SATs, GREs, MCATS or other tests how well you're going to succeed at something," said University of Illinois psychology professor and Beckman Institute director Art Kramer, who led the research. These methods, along with studies that look at the relative size of specific-brain structures, have had some success predicting learning, Kramer said, "but never to this degree in a task that is so complex." ...
                                                                    After having their brains imaged, participants spent 20 hours learning to play Space Fortress, a video game developed at the University of Illinois in which players try to destroy a fortress without losing their own ship to one of several potential hazards. None of the subjects had much experience with video games prior to the study.
                                                                    The game, which was designed to test participants' real-world cognitive skills, is quite challenging, Kramer said. ... The findings should not be interpreted to mean that some people are destined to succeed or fail at a given task or learning challenge, however, Kramer said. "We know that many of these components of brain structure and function are changeable," he said.

                                                                    [Not sure this has much to do with economics, but it's all I have right now -- feel free to talk about whatever in comments.]

                                                                      Posted by on Thursday, January 13, 2011 at 02:34 PM in Economics, Science | Permalink  Comments (14) 


                                                                      Initial Claims for Unemployment Insurance Rise: Is There Trouble Ahead?

                                                                      At MoneyWatch, I have a reaction to this week's disappointing numbers on initial claims for unemployment insurance:

                                                                      Initial Claims for Unemployment Insurance Rise: Is There Trouble Ahead?

                                                                        Posted by on Thursday, January 13, 2011 at 09:57 AM in Economics, Unemployment | Permalink  Comments (8) 


                                                                        Krugman: "The Road to Economic Crisis Is Paved With Euros"

                                                                        Paul Krugman on the euro:

                                                                        Can the Euro be Saved, by Paul Krugman: There's something peculiarly apt about the fact that the current European crisis began in Greece. For Europe’s woes have all the aspects of a classical Greek tragedy, in which a man of noble character is undone by the fatal flaw of hubris.

                                                                        Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. In much of Europe, rules governing worker firing helped limit job loss, while strong social-welfare programs ensured that even the jobless retained their health care and received a basic income. Europe’s gross domestic product might have fallen as much as ours, but the Europeans weren’t suffering anything like the same amount of misery. And the truth is that they still aren’t.

                                                                        Yet Europe is in deep crisis — because its proudest achievement, the single currency adopted by most European nations, is now in danger. More than that, it’s looking increasingly like a trap. ...[continue]...

                                                                          Posted by on Thursday, January 13, 2011 at 08:51 AM in Economics, International Finance | Permalink  Comments (30) 


                                                                          Coase Does Not Like the Term "Coasean Economics"

                                                                          This is from an interview of Ronald Coase:

                                                                          ...RC (Ronald Coase): One way for the [Coase China] Society to advance the right kind of economics to China, and encourage Chinese economists to do the right kind of work, is to have a journal of its own. When I was editor of the Journal of Law and Economics, I was very active. I would attend seminars and conferences and talk to people to see what kind of research they were doing. I would solicit their articles if I thought they were good ones. And frequently, I would talk to people and encourage them to conduct certain studies with the promise to publish their article.
                                                                          WN (Wang Ning): This is indeed very different from the way journals are run now.
                                                                          RC: I do not believe any other journal was run the same way then. Most journal editors wait for submitted articles and use external reviewers to select the articles for publication. This was not the way I worked. I knew what kind of articles I would like to publish, and I went around to find people to write them.
                                                                          I’ll give you an example. Bernard Siegan came to the University of Chicago Law School as a Fellow and proposed to write a paper on the pros and cons of zoning. I told him instead to find a place where zoning did not exist and to see what happened to land use in comparison to places with zoning. He wrote a great paper about land use in Houston which did not have zoning (The paper was published as "Non-Zoning in Houston, Journal of Law and Economics (1970)).
                                                                          Another example is Steve's article on bees. I knew there were contracts between beekeepers and orchard owners in Washington. I asked Steve to investigate it. He did a splendid study (The paper was published as "The Fable of Bees, in Journal of Law and Economics (1973)). ...
                                                                          WN: ... But the opportunity cost was probably very high. At the prime time of your research, you devoted yourself to the Journal instead of your own research. You might have written another one or two articles as great as "The Nature of the Firm" or "The Problem of Social Cost."
                                                                          RC: I do not regret my decision at all. This was the main attraction for me to come to Chicago. I think this was the only way to develop a subject. If it were not for the Journal, many articles would not have been published or even written.
                                                                          WN: Based on your experience, what should the Society do if it launches a new journal?
                                                                          RC: You should have a clear view of what you want to accomplish, what articles you want to publish and what kind of research you want to encourage. You shall not worry about how other people think about your views. You cannot control what other people think. You will not monopolize the whole field. If you believe in your view, you have to be strong to defend it and promote it in the market for ideas until you are convinced that it is proved wrong. This is the only way to be independent.
                                                                          WN: I totally agree. But I don't think we have got the second Coase yet. When you started editing the Journal of Law and Economics, you were already well established in the profession. Your view, no matter whatever it was, would be considered seriously and readily command agreement.
                                                                          RC: I do not think that was the case. I always find myself in disagreement with the prevailing view. Even today, my view of the subject is not accepted by the profession. ...

                                                                          And:

                                                                           ...WN: You mentioned many times that you do not like the term, "Coasean economics", and prefer to call it simply the "right economics" or "good economics".  What separates the good from bad, the right from wrong?
                                                                          RC: The bad or wrong economics is what I called the "blackboard economics". It does not study the real world economy. Instead, its efforts are on an imaginary world that exists only in the mind of economists, for example, the zero-transaction cost world.
                                                                          Ideas and imaginations are terribly important in economic research or any pursuit of science. But the subject of study has to be real.
                                                                          WN: Since the Coase China Society is named after you, we cannot avoid using Coasean altogether.
                                                                          RC: I do not like the term Coasean economics. The right economics that I have in mind, or what you called Coasen economics, is what economics ought to be.
                                                                          WN: Absolutely. The whole reason to establish the Coase China Society is exactly to bring it about so that the right economics will prevail. ...

                                                                            Posted by on Thursday, January 13, 2011 at 12:06 AM in Economics | Permalink  Comments (7) 


                                                                            Wednesday, January 12, 2011

                                                                            links for 2011-01-12

                                                                              Posted by on Wednesday, January 12, 2011 at 10:02 PM in Economics, Links | Permalink  Comments (15) 


                                                                              Recovery?

                                                                              When the last several employment reports have shown modest gains in employment, many of us have noted that even so, the number of jobs created is barely enough to keep up with population growth. This graph of the employment-population ratio over the last 5 years shows this clearly:

                                                                              Emp-pop

                                                                              I'll feel more confident about the economy when this ratio begins growing robustly instead of bouncing along the bottom of the valley like it's doing now.

                                                                              [Also posted at MoneyWatch.]

                                                                                Posted by on Wednesday, January 12, 2011 at 06:48 PM in Economics, Unemployment | Permalink  Comments (20) 


                                                                                Income Distribution and Social Insurance

                                                                                Stephen Williamson:

                                                                                Income Distribution Part II, by Stephen Williamson: Here's another thought relating to this post. Our basic notion of social insurance is that each of us is placed, at birth, in a set of circumstances beyond our control. Before birth, we're not able to write insurance contracts that will compensate us for being born poor, for being born with a serious disease or birth defect, or for other possible bad events. There is then some role for the government in stepping in to provide the insurance that the private market cannot provide, by redistributing income from the rich to the poor, providing health care, or other interventions.
                                                                                The problem we have to deal with is that, as we teach students in Econ 101, prices help to allocate resources efficiently. To a degree, people are rich by virtue of the fact that society puts a high value on their services, and society puts a high value on their services because these are the services society wants. To provide the services that society wants, people have to be motivated to provide them. Becoming a skilled brain surgeon requires time and effort, and people won't do it if there is no payoff.
                                                                                Thus, what we have here is a very standard economic problem. We are trading off insurance with incentives. ...

                                                                                When I see the argument about trading off incentives (efficiency) for insurance, the first and most basic question is if there is a market failure preventing the insurance from being offered by the private sector -- and there seems to be -- why does correcting it reduce rather than increase efficiency? (On the need for social insurance more generally -- Social Security in particular -- and the underlying market failure problems, see here.)

                                                                                But I want to ask a different question. Why aren't incentives subject to diminishing returns? Suppose that the normal rate of profit is 5%, and the expected re4turn on a the investment in new, novel, innovative product is 12%. If we, through taxes, reduce the expected return to 10% or 11%, how much would incentives fall? I think the answer is "not much, if at all." By standard diminishing returns arguments, the first increase of one percentage point (to 6%) ought to provide the largest change in incentives, the next increase to 7% somewhat less, to 8% less yet, until at some point the incremental value in terms of incentives is near zero. When profit rates are very high, the tradeoff seems much less important.

                                                                                Thus, even if a negative tradeoff between insurance and efficiency exists -- and as noted in the first paragraph it's not clear that it does -- the negative effects appear to be relatively small when profits are expected to be far above normal.

                                                                                However, a tax that, say, reduces the expected return on every project by 2% could cause problems for those projects that have expected returns near normal (e.g. if the expectation is 6.5%, the tax would make the project unprofitable). But there is a way around this, at least to an approximation that is close enough. Highly progressive taxes only hit the very successful -- such as those projects where the winner takes all and has very high profits -- while hardly affecting projects that do not result in such high incomes as rewards. Thus, this sort of scheme can provide the insurance that is needed without having much affect on incentives, the thing many seemed most worried about.

                                                                                [These are quick thoughts between meetings, I'm already late, so I haven't thought through this as much as I'd like. But perhaps it will give you something to discuss in comments.]

                                                                                  Posted by on Wednesday, January 12, 2011 at 10:35 AM in Economics, Social Insurance | Permalink  Comments (43) 


                                                                                  "Don't Believe What's Said About the Debt Ceiling"

                                                                                  Stan Collender argues that we are too worried about what might happen if Congress refuses to increase the debt limit:

                                                                                  Don’t Believe What’s Said About Debt Ceiling, by Stan Collender [CC]: There is so much misinformation and grossly misleading talk about what will happen if the federal debt ceiling isn’t increased...
                                                                                  First, not raising the current federal debt limit absolutely will not immediately shut down the federal government. ... Government shutdowns occur when the appropriation that funds a department or agency isn’t enacted. ...
                                                                                  Second, and again contrary to what some have stated as gospel, reaching the debt ceiling will not automatically lead to a federal default on the nation’s existing debt. That will only stop the government from borrowing more than the current limit and force it to rely on other ways to finance its activities.
                                                                                  Although the comparison isn’t perfect, the situation is similar to what happens when individuals max out credit cards. They don’t stay home with the lights off, gently rocking back and forth in a corner; they find other sources of money or change their activities to match the cash available. That could mean delaying paying a bill, taking cash from a savings account, getting a loan from a family member or friend, waiting for the next paycheck, or selling a car or some other possession. ...
                                                                                  In a letter last week to Speaker John Boehner ... about the debt ceiling, Treasury Secretary Timothy Geithner mentioned that the federal government has an equivalent to each of these things. What Geithner didn’t mention is that the federal government also has a number of other tactics, such as leasing an asset — the federal equivalent of renting out a room in your home — or significantly slowing down payments to government contractors and others. These additional tactics may not have been used in the past and may be disheartening or even embarrassing to some, but they are available to avoid a crisis.
                                                                                  Third, if a standoff on raising the debt ceiling lasts for a significant amount of time, the alternatives to borrowing eventually may not be enough to provide the government with the cash it needs to meet its obligations. Even at that point, however, a default wouldn’t be automatic because payments to existing bondholders could be made the priority while payments to others could be delayed for months. ...
                                                                                  Fourth, all of this means that those who think refusing to increase the federal debt ceiling when it is reached later this year will force the White House to accept budget changes will likely find the administration surprisingly unmoved, perhaps for months to come. If the administration is willing to use all of the cash management techniques available to it, the biggest negative reaction will likely come from Wall Street and those whose payments are delayed. Uncertainty in the schedule for auctioning Treasury securities will upset the bond market and it may express its unhappiness both rhetorically and with higher interest rates. But the confrontation is far more likely to be a war of words than an actual battle over the budget...

                                                                                    Posted by on Wednesday, January 12, 2011 at 12:44 AM in Budget Deficit, Economics, Politics | Permalink  Comments (74) 


                                                                                    Tuesday, January 11, 2011

                                                                                    links for 2011-01-11

                                                                                      Posted by on Tuesday, January 11, 2011 at 10:02 PM in Economics, Links | Permalink  Comments (41) 


                                                                                      "Media and Political Culture"

                                                                                      Daniel Little:

                                                                                      Media and political culture, Understanding Society: How are people's political beliefs, concerns, and passions influenced within a modern mass society? There are many mechanisms, certainly: family, school, place of worship, place of work, and military service, to name several. But certainly the various channels of the media play an important role. Newspapers, television and radio, social media, and blogs have a manifest ability to focus some parts of the electorate on one issue or another.

                                                                                      So it seems worthwhile to ask whether it is possible to perform some empirical study of the content and value systems associated with various media channels. (Here is a textbook by Klaus Krippendorff on the use of content analysis in journalism and the media; Content Analysis: An Introduction to Its Methodology.) This question falls into several parts: first, are there important differences in content and tone across various media channels? And second, what effects do these configurations of content and tone have on the users of the media?

                                                                                      The Pew Research Center's Project for Excellent Journalism offers a window into the first of these questions with a fascinating new tool (link). The "Year in the News Interactive" tool is the front end of a valuable database that codes various media streams according to content. The database is then searchable so that the user can produce reports on the percentage of the "newshole" devoted to a particular issue or person in a particular medium. Here is a sample of what the tool produces:

                                                                                      This chart repays close examination. It picks out five segments of media -- "All Media," "Large Papers," Talk Radio," "NBC Evening News," and "Fox News," and it compares these outlets with respect to five issues: Obama Administration, Health Care, Tea Party, Mosque Controversy, and Sarah Palin. These are highly politicized issues, so it is interesting to see how the patterns of treatment differ across different segments of the media.

                                                                                      If we consider "All Media" as a benchmark -- representing the average amount of attention given by the media as a whole to various issues -- we see that Talk Radio and Fox News show a few remarkable patterns. Both sources give the mosque controversy more than twice the percentage of the newshole; likewise the Tea Party gets twice as much attention with Talk Radio and Fox News as with All Media. Fox News gives Sarah Palin over twice the exposure she gets from All Media -- and nine times the exposure she gets from Large Papers. Both Talk Radio and Fox News give an inordinate amount of air time to Health Care and the Obama Administration.

                                                                                      Now take a different cut: the network news programs and Fox News with respect to a much less political list of topics -- BP Oil Spill, Haiti Earthquake, Toyota Accelerator Recall, and Cyberspace.

                                                                                      Here the main contrast that seems evident is that Fox News devotes significantly less time to the non-political issues. Fox devoted about half the percentage of its newshole to the BP Oil Spill compared to NBC news; Haiti got roughly a third the amount attention on Fox; and the Toyota Accelerator Recall got less than half the exposure as it received on NBC news.

                                                                                      At a minimum, this shows something pretty interesting: the regular viewer or listener to Fox News and Talk Radio will get a very different view of the world from the person exposed to All Media or Large Papers. These media channels give an inordinate amount of airtime to "hot button" issues that have the potential of inflaming their viewers. And these channels spend much less time that the other media on non-political issues -- Haiti, Toyota recall, or Cyberspace.

                                                                                      What would be particularly interesting in today's environment is an additional dimension of content analysis, reflecting antagonism, intolerance, and hostility. It would be very useful to have a few years of data on the percentage of the newshole devoted to incendiary reporting about issues, individuals, and the government. Many observers have the definite impression that this kind of language has increased dramatically; it would be very useful to have quantifiable data on this topic.

                                                                                      (As we think about the tenor and extremism of some of the voices in political media today, it is sobering to remember the role that "hate radio" played in the Rwandan genocide; link.)

                                                                                        Posted by on Tuesday, January 11, 2011 at 08:10 PM in Economics, Press | Permalink  Comments (12) 


                                                                                        Inequality and Redistribution

                                                                                        Continuing the discussion on inequality and what might be done about it, here's Paul Krugman:

                                                                                        Economics and Morality, by Paul Krugman: ...Eric Schoeneberg ... argues that the right is winning economic debates because people believe, wrongly, that there’s something inherently moral about free-market outcomes. My guess is that this is only part of the story... Still, Schoeneberg is right about the tendency to ascribe moral value to market values, and the need for a counter-narrative. I’m going to think about that; but right now, let me describe how I see the US income distribution in terms of justice or the lack thereof.

                                                                                        The first thing one should say is that our system does reward hard work, up to a point. Other things equal, those who put more in will earn more.
                                                                                        But a lot of other things are, in fact, not remotely equal. These days, America is the advanced nation with the least social mobility (pdf), except possibly for Britain. Access to good schools, good health care, and job opportunities depends on lot on choosing the right parents.
                                                                                        So when you hear conservatives talk about how our goal should be equality of opportunity, not equality of outcomes, your first response should be that ... they must be in favor of radical changes in American society. For our society does not, in fact, produce anything like equal opportunity (in part because it produces such unequal outcomes). Tell me how you’re going to produce a huge improvement in the quality of public schools, how you’re going to provide universal health care..., and then come back to me about the equal chances at the starting line thing.
                                                                                        Now, inequality of opportunity is only one reason for the inequality in outcomes we actually see. But of what remains, how much reflects individual effort, how much reflects talent, and how much sheer luck? No reasonable person would deny that there’s a lot of luck involved. ... So ... the social and economic order we have doesn’t represent the playing out of some kind of deep moral principles.
                                                                                        That doesn’t mean the order we have should be overthrown: the pursuit of Utopia, of perfect economic justice, has proved to be the road to hell, while welfare-state capitalism — a market economy with its rough edges smoothed by a strong safety net — has produced the most decent societies ever known. The point, though, is that anyone who claims that transferring some income from the most fortunate members of society to the least is a vile injustice is closing his eyes to the obvious reality of how the world works.

                                                                                        And, in a follow up:

                                                                                        More Thoughts on Equality of Opportunity, by Paul Krugman: ...I think there’s a bit of an intellectual trap lurking here. As I pointed out, the typical conservative line about equality of opportunity, not results, really implies the need for a radical restructuring of our society, which doesn’t offer anything remotely resembling equal opportunity. At this point, however, there’s a tendency to think about what that restructuring would involve — and because it’s basically impossible, to throw up one’s hands.
                                                                                        The point is that you don’t, in fact, have to be that radical once you drop the rigidity of the conservative position. If you admit that life is unfair, and that there’s only so much you can do about that at the starting line, then you can try to ameliorate the consequences of that unfairness.
                                                                                        My vision of economic morality is more or less Rawlsian: we should try to create the society each of us would want if we didn’t know in advance who we’d be. And I believe that this vision leads, in practice, to something like the kind of society Western democracies have constructed since World War II — societies in which the hard-working, talented and/or lucky can get rich, but in which some of their wealth is taxed away to pay for a social safety net, because you could have been one of those who strikes out.
                                                                                        Such a society doesn’t correspond to any kind of abstract ideal, whether it’s “people should be allowed to keep what they earn” or “from each according to his ability, to each according to his needs”. It’s a very non-Utopian compromise. But it works, and it’s a pretty decent arrangement...
                                                                                        That decency is what’s under attack by claims that it’s immoral to deprive society’s winners of any portion of their winnings. It isn’t.

                                                                                        My point here is that economic inequality is growing, so we need to consider enhancing programs that can stop or at least attenuate the growing divide between those at the top and everyone else. But, instead, we appear to be headed in the other direction.

                                                                                          Posted by on Tuesday, January 11, 2011 at 09:45 AM in Economics, Income Distribution, Policy | Permalink  Comments (55) 


                                                                                          State Of The Union

                                                                                          James Surowiecki on the decline in unions:

                                                                                          State Of The Unions, by James Surowiecki: In the heart of the Great Depression, millions of American workers did something they’d never done before: they joined a union. ...
                                                                                          Seventy-five years later, in the wake of another economic crisis, things couldn’t be more different. ... In the recent midterm elections, voters in several states passed initiatives making it harder for unions to organize. Across the country, governors and mayors wrestling with budget shortfalls are blaming public-sector unions for the problems. And in polls public support for labor has fallen to historic lows. ...
                                                                                          There are a couple of reasons for this. In the past, a sizable percentage of American workers belonged to unions, or had family members who did. Then, too, even people who didn’t belong to unions often reaped some benefit from them...: in heavily unionized industries, non-union employers had to pay their workers better in order to fend off unionization. Finally, benefits that union members won for themselves—like the eight-hour day, or weekends off—often ended up percolating down to other workers. ...
                                                                                          Even though unions remain the loudest political voice for workers’ interests, resentment has replaced solidarity... The Great Depression invigorated the modern American labor movement. The Great Recession has crippled it.

                                                                                          Globalization also works against unions, and lack of political support over the last several decades -- or in some cases attempts by politicians to undermine unions -- has not helped either. It's not clear what type of institution can work at an international level to restore the bargaining power workers have lost with the decline in unions, but it is clear that something like this is needed.

                                                                                            Posted by on Tuesday, January 11, 2011 at 12:04 AM in Economics, Unemployment | Permalink  Comments (35) 


                                                                                            Monday, January 10, 2011

                                                                                            links for 2011-01-10

                                                                                              Posted by on Monday, January 10, 2011 at 10:11 PM in Economics, Links | Permalink  Comments (16) 


                                                                                              Arizona Shooter's Obsession with Returning to the Gold Standard

                                                                                              The editors at CBS MoneyWatch asked my to discuss Jared Lee Lougher's views on the gold standard, and whether his call to return to the gold standard is entirely crazy. They thought that there might be "value in giving some context on his views and noting that he's not alone in holding them":

                                                                                              Arizona Shooter's Obsession with Returning to the Gold Standard

                                                                                                Posted by on Monday, January 10, 2011 at 03:06 PM in Economics, Monetary Policy | Permalink  Comments (44) 


                                                                                                Eichengreen: The Dollar: Dominant no more?

                                                                                                The introduction to this article at Vox EU has a quote from Barry Eichengreen: “If you were worried by talk of currency war late last year, you ain’t seen nothin’ yet”:

                                                                                                The Dollar: Dominant no more?, by Barry Eichengreen, Vox EU: If the euro’s crisis has a silver lining, it is that it has diverted attention away from risks to the dollar. It was not that long ago that confident observers were all predicting that the dollar was about to lose its “exorbitant privilege” as the leading international currency. First there was financial crisis, born and bred in the US. Then there was the second wave for quantitative easing, which seemed designed to drive down the dollar on foreign exchange markets. All this made the dollar’s loss of pre-eminence seem inevitable.
                                                                                                The tables have turned. Now it is Europe that has deep economic and financial problems. Now it is the European Central Bank that seems certain to have to ramp up its bond-buying program. Now it is the Eurozone where political gridlock prevents policymakers from resolving the problem.
                                                                                                In the US meanwhile, we have the extension of the Bush tax cuts together with payroll tax reductions, which amount to a further extension of the expiring fiscal stimulus. This tax “compromise”, as it is known, has led economists to up their forecasts of US growth in 2011 from 3% to 4%. In Europe, meanwhile, where fiscal austerity is all the rage, these kind of upward revisions are exceedingly unlikely.
                                                                                                All this means that the dollar will be stronger than expected, the euro weaker. China may haves made political noises about purchasing Irish and Spanish bonds, but which currency – the euro or the dollar – do you think prudent central banks will it find more attractive to hold?
                                                                                                What about the alternatives?
                                                                                                There are of course a variety of smaller economies whose currencies are likely to be attractive to foreign investors, both public and private, from the Canadian loonie and Australian dollar to the Brazilian real and Indian rupee. But the bond markets of countries like Canada and Australia are too small for their currencies to ever play more than a modest role in international portfolios.

                                                                                                Continue reading "Eichengreen: The Dollar: Dominant no more?" »

                                                                                                  Posted by on Monday, January 10, 2011 at 01:08 PM in Economics, International Finance | Permalink  Comments (8) 


                                                                                                  Paul Krugman: Climate of Hate

                                                                                                  Whether the shooting in Arizona is the beginning or the end depends upon how leaders within the GOP respond:

                                                                                                  Climate of Hate, by Paul Krugman, Commentary, NY Times: ...I’ve had a sick feeling in the pit of my stomach ever since the final stages of the 2008 campaign. I remembered the upsurge in political hatred after Bill Clinton’s election in 1992 — an upsurge that culminated in the Oklahoma City bombing. And you could see, just by watching the crowds at McCain-Palin rallies, that it was ready to happen again. The Department of Homeland Security reached the same conclusion... One of these days, someone was bound to take it to the next level. And now someone has.
                                                                                                  It’s true that the shooter in Arizona appears to have been mentally troubled. But that doesn’t mean that his act can or should be treated as an isolated event, having nothing to do with the national climate.
                                                                                                  Last spring Politico.com reported on a surge in threats against members of Congress, which were already up by 300 percent. A number of the people making those threats had a history of mental illness — but something about the current state of America has been causing far more disturbed people than before to act out their illness by threatening, or actually engaging in, political violence.
                                                                                                  And there’s not much question what has changed. ... It’s not a general lack of “civility”..., there’s a big difference between bad manners and calls, explicit or implicit, for violence; insults aren’t the same as incitement.
                                                                                                  The point is that there’s room in a democracy for people who ridicule and denounce those who disagree with them; there isn’t any place for eliminationist rhetoric ... that lies behind the rising tide of violence.
                                                                                                  Where’s that toxic rhetoric coming from? Let’s not make a false pretense of balance: it’s coming, overwhelmingly, from the right. It’s hard to imagine a Democratic member of Congress urging constituents to be “armed and dangerous” without being ostracized; but Representative Michele Bachmann, who did just that, is a rising star in the G.O.P.
                                                                                                  And there’s a huge contrast in the media. Listen to Rachel Maddow or Keith Olbermann, and you’ll hear a lot of caustic remarks and mockery aimed at Republicans. But you won’t hear jokes about shooting government officials or beheading a journalist... Listen to Glenn Beck or Bill O’Reilly, and you will.
                                                                                                  Of course, the likes of Mr. Beck and Mr. O’Reilly are responding to popular demand. ... But even if hate is what many want to hear, that doesn’t excuse those who pander to that desire. They should be shunned by all decent people.
                                                                                                  Unfortunately, that hasn’t been happening: the purveyors of hate have been treated with respect, even deference, by the G.O.P. establishment. ...
                                                                                                  So will the Arizona massacre make our discourse less toxic? It’s really up to G.O.P. leaders. Will they accept the reality of what’s happening to America, and take a stand against eliminationist rhetoric? Or will they try to dismiss the massacre as the mere act of a deranged individual, and go on as before?
                                                                                                  If Arizona promotes some real soul-searching, it could prove a turning point. If it doesn’t, Saturday’s atrocity will be just the beginning.

                                                                                                    Posted by on Monday, January 10, 2011 at 01:53 AM in Economics, Politics | Permalink  Comments (117) 


                                                                                                    Fed Watch: Are Oil Prices About to Undermine the Recovery?

                                                                                                    Tim Duy:

                                                                                                    Calculated Risk directs us to an LA Times story identifying the possibility that rising gasoline prices will undermine the recovery. He also reminds us that James Hamilton recently wrote on the subject as well, concluding:

                                                                                                    I could certainly imagine that an abrupt move up in gasoline prices from here could hurt the struggling recovery of the domestic auto sector and dampen overall consumer spending. I do not think it would be enough to give us a second economic downturn, but it could easily be a factor reducing the growth rate.

                                                                                                    I would add that the current price appears inline with the general upward trend since the beginning of last decade. Here I extrapolated on the 2000-2006 trend:

                                                                                                    New Picture
                                                                                                    The sudden rise in oil in 2007, a clear deviation from the trend in the first half of the decade, led to substantial demand destruction, a severe blow to the US economy which at the time was struggling under the weight of the housing meltdown and the financial crisis (and arguably still is). The recent rise in oil appears different, more a reestablishment of the previous trend.

                                                                                                    From this point on, I tend to think the issue is less of will oil continue to rise, but at what speed will it rise. The trend over the last decade appears to make a lie of recent claims that we have entered into a period of plentiful energy (see also James Hamilton), and while higher oil prices will tend to crimp growth, a gradual price increase should allow for non-disruptive adaptation on the part of economic agents.

                                                                                                    What I more concerned with is the possibility of another sharp spike in prices, such as occurred in 2007-08. A repeat of that incident would once again cripple households, who, after 18 months of recovery, are just barely starting to see the light. The most obvious channel to trigger such a spike is monetary, that the Federal Reserve's large scale asset purchases trigger a disruptive decline in the Dollar. Federal Reserve Chairman Ben Bernanke was not buying that story last week. From the Wall Street Journal:

                                                                                                    Mr. Bernanke says his quantitative easing policy is not to blame for the sharp increase in the price of oil. Instead, oil’s rise is the result of strong demand from emerging markets. The dollar, he notes, has been “quite stable” in the past few months. One worry in the run up to the Fed’s $600 billion bond-buying announcement in November was that it was going to cause the dollar to fall sharply, which would in turn put upward pressure on commodities like oil priced in dollars. The stable dollar, which has risen since the program’s announcement, implies the Fed isn’t the problem in commodities markets, Mr. Bernanke notes.

                                                                                                    Movements in commodity prices have not been sufficiently disruptive to suggest a Fed-induced cause is at hand, and have tended to be more consistent with indications of general economic improvement.

                                                                                                    In short: Energy prices are yet another thing to keep an eye on. Still, recognize the increase to date appears to be more of a return to the recent trends than a disruptive price spike. Not that rising prices won't have consequences, but the trend of the past decade may simply be something we need to learn to live with. Rather than watching the trend itself, be watching for upward spikes from that trend - those would almost certainly translate into something nasty for the still struggling US economy.

                                                                                                      Posted by on Monday, January 10, 2011 at 01:04 AM in Economics, Fed Watch, Monetary Policy, Oil | Permalink  Comments (23)