links for 2010-01-20
Falling Short on the Economic Stimulus: We Are Live at the Wall Street Journal...

Ten Economics Pieces Worth Reading: January 20, 2010

1) John Quiggin, Conclusion to *Zombie Economics: The Dead Ideas That Walk Among Us Eating Our Brains:

The prevailing emphasis on logical rigor has given economics an internal consistency that is missing in other social science. But there is little value in being consistently wrong. Economics must move on from the infinitely rational, farsighted and asocial beings whose decisions have been the central topic of analysis in recent decades. It will still be necessary to abstract.... But the factors that are relevant in microeconomic analysis of goods markets may not be the same as that matter in labor markets or in analysis of macroeconomic aggregates.

Three decades in which market liberals have pushed policies based on ideas of efficiency and claims about the efficiency of financial markets have not produced much in the way of improved economic performance, but they have led to drastic increases in inequality, particularly in the English-speaking world.... [W]ith the collapse of yet another economic ‘New Era’ it is time for the economics profession to display some humility.... [E]conomists can still contribute to a better understanding of the strengths and weaknesses of markets, firms and other forms of economic organization, and the possibilities for policy action to yield improved economic and social outcomes.... The global financial crisis gives the economics profession the chance to bury the zombie ideas that led the world into crisis, and to produce more realistic, humble and above all socially useful body of thought.

2) Sam Stein: White House To Make Major Regulatory Reform Push After Health Care: Goolsbee:

"We're coming to the closing chapter of health care," said Austan Goolsbee, a close Obama confidant and member of the president's Council of Economic Advisers. "The president has been pretty clear that when health care is done he wants financial regulatory reform, the holding accountable of financial institutions, and now he's setting the stage...". Asked about news that Senate Banking Committee Chairman Chris Dodd (D-Conn.) was considering dropping plans to create a wholly independent Consumer Financial Protection Agency, Goolsbee reiterated that the president wanted the new body.... "The president has always said he thought a consumer authority was important, that there is a tendency when it is spread over seven different agencies at it is now -- when nobody's primary responsibility is that -- that it can fall by the wayside, as you saw in past years," Goolsbee said....

Projected to bring in up to $117 billion, the recollection measure is also required under the statute of the TARP. All of which, Goolsbee said, makes criticism from some conservatives and the banking lobby (mainly, that the tax will be passed down to consumers and shareholders) all the more difficult to rationalize. "[These banks] are flush with profits. They're talking about setting record bonuses. When they announced those things there was no discussion about those bonuses costing consumers or reducing lending," Goolsbee said. "So I find it a little unusual that when asked to pay back the money that the government and the American people are owed for the rescue, that now the argument is 'Oh, they don't have the money.'"

Pressed as to why it took the president so long to announce this tax -- and, in the process, adopt a populist approach to the banks that many in his party have long pined for -- Goolsbee replied: "I don't think the president has changed. His emphasis from the beginning was he wanted accountability from the banks. We had to get through a period of rescue, we're getting through a period of health care, we're now putting direct focus on, our key priority is, financial regulatory reform, and people are starting to notice that."

3) Paul de Grauwe: Ominous lessons of the 1930s for Europe:

[A]s in the 1930s, the dividing line is the same. The US and the UK have allowed their currencies to depreciate; the continental European countries tied in the euro area have allowed their currency to become significantly overvalued.... Why do the euro area countries repeat the same policies as the gold bloc countries in the 1930s? The answer is economic orthodoxy. In the 1930s it was the orthodoxy inspired by the last vestiges of the gold standard. Today the economic orthodoxy that inspires the European Central Bank is very different, but no less constraining. It is the view that the foreign exchange market is better placed than the central bank to decide about the appropriate level of the exchange rate. A central bank should be concerned with keeping inflation low and not with meddling in the forex market. As a result, the ECB has not been willing to gear its monetary policy towards some exchange rate objective. Just as in the 1930s, the euro area countries will pay a price for this orthodoxy. The price will be a slower and more protracted recovery from the recession. This will also make it more difficult to deal with the internal disequilibria within the eurozone between the deficit and the surplus countries....

True, since the start of the crisis, the ECB has injected plenty of liquidity in the euro money markets to support the banking system. Yet it has been much more timid than the US Federal Reserve and the Bank of England in creating liquidity. While the latter more than doubled the size of their balance sheets since October 2008 and thereby more than doubled the supply of central bank money, the ECB’s balance sheet increased by less than 50 per cent. Such an imbalance in the expansion of central bank money inevitably spills over in the foreign exchange markets. The massive supply of dollars and pounds created by the US and UK monetary authorities was transmitted to other financial markets in search of higher yields and in so doing put upward pressure on the value of the euro. Thus the greater timidity of the ECB in providing liquidity is an important factor explaining why the euro has rallied since the start of the banking crisis and why it is now excessively overvalued.

Ultimately a central bank has to make choices. The Fed and the Bank of England have opted for massive programmes of liquidity creation, attaching a low weight to the possible inflationary consequences of their actions. The ECB has been more conservative in its liquidity, creating programmes attaching a low weight to the consequences for the exchange rate and to the chances of a quick recovery. The future will tell us which of these choices was right.

4) Menzie Chinn: Policies for Increasing Economic Growth and Employment:

Interestingly, the two policies that have the maximal (and mean of range) impact on employment are "Increasing aid to the unemployed", and "Reducing Employers' Payroll Taxes for Firms That Increase Their Payroll". Both of these have larger impacts than measures that take away revenue streams from Social Security.

5) Scott Sumner: There’s one country that took Andy Harless’s advice:

As you know, I have relentlessly argued that the Fed made a huge mistake in mid-2008 by not targeting NGDP at about a 5% growth trajectory, level targeting.... If we don’t have a sensible monetary policy regime, then low inflation makes an economy more susceptible to bumping against the zero-rate bound. Nick Rowe compares the problem to balancing a tall pole in one hand.... In the 1980s we brought inflation down from double-digits to about 4%.  Should we have declared victory and stayed at that level?  In retrospect, we probably should have. We did get inflation down to about 3% in the 1990s, and only 1.8% in terms of the GDP deflator from mid-2000 to mid-2008.  At the time I thought this was good, because it lowers the real tax rate on capital.  But in retrospect it was a big mistake, as the cost of the liquidity trap we stumbled into in late 2008 will vastly exceed the gains from 1% or 2% lower inflation.  Indeed one of the costs will be a massive increase in our national debt, which will almost certainly lead to much higher tax rates on saving and investment. Interestingly, I know of only one country that stayed away from the ever lower inflation obsession of the major central banks.  The Bank of Australia.  Australia had about 4% inflation in their GDP deflator and 7.4% NGDP growth between 2000:2 and 2008:2.  With a much higher inflation and NGDP trend rate going into the crisis, they we able to avoid the zero interest rate bound.  And by the way, for those who think nominal shocks don’t explain real events like the recent recession, Australia was the only major developed economy to avoid a recession last year. Indeed they haven’t had one since 1991.  They are called ‘the lucky country,” but I have argued that their culture lacks our puritanical obsession with inflation.  Perhaps each member of our FOMC should drink a 6-pack of Fosters before their policy meetings.

6) Nouriel Roubini: The Risky Rich:

[R]ating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe. The severe recession, combined with the financial crisis during 2008-2009, worsened developed countries’ fiscal positions, owing to stimulus spending, lower tax revenues, and backstopping and ring-fencing of their financial sectors.... More ominously, monetization of these fiscal deficits is becoming a pattern in many advanced economies, as central banks have started to swell the monetary base.... Fiscal stimulus is a tricky business. Policymakers are damned if they do and damned if they don’t. If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation. But if monetized fiscal deficits are allowed to run, the increase in long-term yields will put a chokehold on growth.... The US and Japan might be among the last to face the wrath of the bond-market vigilantes: the dollar is the main global reserve currency, and foreign-reserve accumulation – mostly US government bills and bonds – continues at a rapid pace. Japan is a net creditor and largely finances its debt domestically. But investors will become increasingly cautious even about these countries if the necessary fiscal consolidation is delayed. The US is a net debtor with an aging population, unfunded entitlement spending on social security and health care, an anemic economic recovery, and risks of continued monetization of the fiscal deficit. Japan is aging even faster, and economic stagnation is reducing domestic savings, while the public debt is approaching 200% of GDP. The US also faces political constraints to fiscal consolidation: Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates, as under President Ronald Reagan...

7) BEST NON-ECONOMICS THING I HAVE READ TODAY: Spencer Ackerman: These Were Not Suicides At Guantanamo:

A major new piece from Scott Horton at Harper’s about the alleged suicide of three detainees at Guantanamo Bay in September 2006.... Horton notices the official explanation for the deaths is absurd: "According to the NCIS, each prisoner had fashioned a noose from torn sheets and T-shirts and tied it to the top of his cell’s eight-foot-high steel-mesh wall. Each prisoner was able somehow to bind his own hands, and, in at least one case, his own feet, then stuff more rags deep down into his own throat. We are then asked to believe that each prisoner, even as he was choking on those rags, climbed up on his washbasin, slipped his head through the noose, tightened it, and leapt from the washbasin to hang until he asphyxiated. The NCIS report also proposes that the three prisoners, who were held in non-adjoining cells, carried out each of these actions almost simultaneously." An autopsy performed at Guantanamo on at least one of the men is similarly incredible, explaining away in an improbable manner the determination that a bone in one of them was broken in a manner that typically suggests manual strangulation. Four former GTMO guards spoke out to Horton about what they believe was a black site — an undisclosed detention facility — at the base they termed  ”Camp No.”... [T]he Holder Justice Department has apparently decided to close an investigation into these deaths.

8) STUPIDEST THING I HAVE SEEN TODAY: Harold Ford: David Saltonstall: Harold Ford, mulling an NY Senate run, says Sen. Kirsten Gillibrand is 'weak':

The interview - granted under the condition that the questions be limited to his rationale for running, and not issues - comes at the end of a rocky first week of buzz surrounding his potential candidacy.

In his first interview last week, Ford confessed that he gets regular pedicures, takes a chauffeur-driven car to work on most days and had been to Staten Island only once - by helicopter. Monday, in an interview at the International House of Pancakes on W. 135th St.,  he tried to laugh off those comments in a clear effort to lend a more common touch to his growing persona.

"This race isn't about feet, it's about issues," he said of ribbing he has taken on the web and elsewhere of his regular pedicures...

9) STUPIDEST THING I HAVE NOT SEEN TODAY: No, I am not going to link. I am going to outsource to John Cole: You’ll Never Get This 21 Minutes Of Your Life Back:

Instapundit, Malkin, and Joe the Plumber discuss politics for PJTV.

There is so much to love about this, I don’t know where to start, but certainly Joe the Plumber bemoaning the lack of spending cuts and general program cuts in the stimulus bill was a highlight. It is almost as if he doesn’t have the first damned clue what he is talking about. A close runner-up would be Instapundit heralding Bush’s MBA as evidence of his awesome managerial skills. There was just so much to love, it is hard to narrow down the “best” parts.

I really don’t understand how bipartisanship is ever going to work when one of the parties is insane. Imagine trying to negotiate an agreement on dinner plans with your date, and you suggest Italian and she states her preference would be a meal of tire rims and anthrax. If you can figure out a way to split the difference there and find a meal you will both enjoy, you can probably figure out how bipartisanship is going to work the next few years.

10) HOISTED FROM THE ARCHIVES: DeLong (December 2002): The Macroeconomic Outlook:

The shape of the yield curve tells us that the market expects rising interest rates.... Market expectations of rising interest rates after a recession are usually correct. Table 2 shows that the actual rise in three-month interest rates, comparing the post-recession year to the average of the ten years following the recession, has in three of four past recessions been larger than the rise that would have been predicted by taking the gap between the ten-year and the three-month yield as an index of expected rate increases.

Conclusion: take the yield curve seriously as a forecast of future interest rate movements. Today the yield curve is telling us to expect substantial Federal Reserve tightening in the next few years: the market expects three-month rates to rise to levels close to eight percent. This expected tightening of monetary policy is of a larger magnitude than has been typically seen after a recession.

Implication: The large change in policy stance the market expects from the Federal Reserve suggests that there is little value added in calculating the effect of fiscal policy changes on production and employment without taking account of the Federal Reserve's likely reaction to fiscal policy changes. One view-a view strongly held by the CBO, for example-is that the Bush administration received and the Clinton administration will receive deficit reduction essentially "for free" as far as its effect on output and employment is concerned...

Comments