links for 2010-01-21
Volckerfest 2010: Return to Glass-Steagall...

Six Economics Pieces Worth Reading: January 21, 2010

1) Gideon Rachman: Why America and China will clash:

The reason that the Google case is so significant is because it suggests that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong. The US has accepted – even welcomed – China’s emergence as a giant economic power because American policymakers convinced themselves that economic opening would lead to political liberalisation in China.

If that assumption changes, American policy towards China could change with it. Welcoming the rise of a giant Asian economy that is also turning into a liberal democracy is one thing. Sponsoring the rise of a Leninist one-party state, that is America’s only plausible geopolitical rival, is a different proposition. Combine this political disillusionment with double-digit unemployment in the US that is widely blamed on Chinese currency manipulation, and you have the formula for an anti-China backlash.

Both Bill Clinton and George W. Bush firmly believed that free trade and, in particular, the information age would make political change in China irresistible. On a visit to China in 1998, Mr Clinton proclaimed: “In this global information age, when economic success is built on ideas, personal freedom is essential to the greatness of any nation.” A year later, Mr Bush made a similar point: “Economic freedom creates habits of liberty. And habits of liberty create expectations of democracy ... Trade freely with the Chinese and time is on our side.”...

So far, the facts are refusing to conform to the theory...

2) James Kwak on Ariba and the Tech Bubble:

Over time, as with all bubbles, we began to doubt. By late 2000, I think most of us realized that reaching the expectations the market had for us was a long shot. And as I said, the fundamental problem wasn’t the software, although the software wasn’t as good as it could have been. It was that the customers were failing at building the marketplace communities as fast as they had envisioned, and as the bubble imploded suddenly they were no longer interested anymore, and suddenly the market expected us to collapse. As it turned out, the customers didn’t really want what they had been desperately scrambling for less than a year before. And we had over two thousand people lined up to build shovels that no one wanted.

There are obviously parallels to the financial craze of 2004-2007, and we did more or less play the part of Chuck Prince (music, dance, etc.). All of the paper wealth went to the heads of people at the boom companies, who started thinking they were smarter and better-looking than they actually were, just like overpaid bankers are convinced they are actually smarter than their college friends who got Ph.D.s in physics and are now struggling junior professors. (Unlike the Wall Street bubble, however, most of that wealth stayed on paper, because of the rule that stock options vest over four years, and the tendency for most people not to cash out at the first opportunity.)

But the big difference, as many have noted, is that ours was an equity bubble, not (for the most part) a debt bubble. Technology startups were funded by venture capital firms, which generally have no debt, and by stock offerings; they generally don’t have the assets and steady cash flows to borrow money. (The telecom infrastructure companies were an exception.) There was little margin borrowing to buy stocks, as compared to the 1920s, so when the NASDAQ crashed, the damage did not spill over into other asset classes, and the financial system didn’t even wobble...

3) Paul Krugman: What Didn’t Happen:

Why was the stimulus underpowered?.... Their political judgment may or may not have been correct; their economic judgment obviously wasn’t... in late 2008 and early 2009 the Obama team was focused on little else. The administration wasn’t distracted; it was just wrong.

The same can be said about policy toward the banks. Some economists defend the administration’s decision not to take a harder line.... But the light-touch approach to the financial industry further entrenched the power of the very institutions that caused the crisis.... And it has had disastrous political consequences: the administration has placed itself on the wrong side of popular rage over bailouts and bonuses.

Finally, about that narrative: It’s instructive to compare Mr. Obama’s rhetorical stance on the economy with that of Ronald Reagan. It’s often forgotten now, but unemployment actually soared after Reagan’s 1981 tax cut. Reagan, however, had a ready answer for critics: everything going wrong was the result of the failed policies of the past. In effect, Reagan spent his first few years in office continuing to run against Jimmy Carter. Mr. Obama could have done the same — with, I’d argue, considerably more justice.... But he didn’t. Maybe he still dreams of bridging the partisan divide; maybe he fears the ire of pundits who consider blaming your predecessor for current problems uncouth — if you’re a Democrat.... Mr. Obama has allowed the public to forget, with remarkable speed, that the economy’s troubles didn’t start on his watch....

At this point Mr. Obama probably can’t do much about job creation. He can, however, push hard on financial reform, and seek to put himself back on the right side of public anger by portraying Republicans as the enemies of reform — which they are...

4) BEST NON-ECONOMICS THING I HAVE READ TODAY: bena:

Picard: Soft on the crystalline entity. Soft on Borg extermination. Vote Nechayev!

5) STUPIDEST THING I HAVE SEEN TODAY: Mike Potemra. Outsourced to Kevin Drum:

Quote of the Day: Conservative Values: From Mike Potemra, over at National Review Online: "I have over the past couple of months been watching DVDs of Star Trek: The Next Generation, a show I missed completely in its run of 1987 to 1994; and I confess myself amazed that so many conservatives are fond of it. Its messages are unabashedly liberal ones of the early post-Cold War era — peace, tolerance, due process, progress.... "You know, conservatives don't usually confess straight up to finding peace, tolerance, due process, and progress so disagreeable.  But I guess they slip up every once in a while.

6) HOISTED FROM THE ARCHIVES: DeLong (2003): Economics 236: Your Last Course in Macroeconomics:

PART I: A QUICK OVERVIEW. January 22: Introduction: Olivier Blanchard (2000), "What Do We Know About Macroeconomics that Fisher and Wicksell Did Not?" Quarterly Journal of Economics 115:4 (November), pp. 1375-1410; Olivier Blanchard (1990), "Why Does Money Affect Output? A Survey", in B.M. Friedman and F. Hahn eds, Handbook of Monetary Economics, 1990, Vol 2, 779-835. January 29: Unemployment and Institutions.... February 5: Contracts and Aggregate Output.... February 12: Taking Technology-Shock Theories Seriously.... PART II: THE GROWING STRENGTH OF BEHAVIORALIST APPROACHES.... The Rationale for Behavioralist Approaches.... Unemployment and Behavioral Economics.... Money Illusion and Aggregate Output.... Savings and Economic Psychology.... What Should Investors Do?.... What Do Investors Do?.... Whither Behavioral Macro?... PART III: GROWTH ONE LAST TIME.... Corruption and Political Blockages to Growth.... Trade and Growth.... Institutional Roots of Growth...

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