Ten Economics Pieces Worth Reading: January 24, 2010
1) Jackie Calmes: Political Memo - Questioning the Use of a Commission on the Debt Limit:
[J]ust in time for the latest debate, the unpublished posthumous memoir of a central figure on the Greenspan panel, Robert M. Ball, a former Social Security commissioner, has emerged to challenge the conventional wisdom about its achievement.... Ball calls the Greenspan Commission a failure. As he tells it, only a willingness to compromise by the two principal antagonists of the time — Ronald Reagan, the Republican president, and Representative Thomas P. O’Neill, the Democratic House speaker — made it possible for Mr. Ball and a few others to salvage from the deadlocked panel a deal that raised payroll taxes and trimmed benefits enough to keep Social Security solvent.
“A commission is no substitute for principled commitment,” wrote Mr. Ball, who died two years ago at 93. He expected that growing deficits soon would spur talk of another such panel. “Above all,” he added, “we should not allow ourselves to fall into the trap of expecting miracles from another Greenspan Commission — by deluding ourselves into believing, mistakenly, that the first one was a great success.”...
The commission met roughly monthly from February to November of 1982 without progress.... December’s session lasted only minutes, though the panel’s deadline was Dec. 31. Mr. Baker’s deputy, Richard Darman, called Mr. Ball and asked, “Can we have a meeting that never took place?” Their rendezvous gave rise to others at Mr. Baker’s house and at Blair House, the government guesthouse near the White House. Four top administration officials, led by Mr. Baker, met with five of the commission’s most pragmatic members — Mr. Ball and Senator Daniel Patrick Moynihan of New York for the Democrats, and for the Republicans, Mr. Greenspan, Senator Robert J. Dole of Kansas and Representative Barber B. Conable Jr. of New York.
Mr. Reagan extended the commission’s life by two weeks to Jan. 15, but it “was no longer functioning,” Mr. Ball wrote. “Some of its members didn’t know we were meeting.” When word leaked and reporters staked out his house before one session, Mr. Ball sneaked out the rear and slid down a hill to a car sent by the White House. The group reached agreement late on Jan. 15, a Saturday, and secured support from a commission majority only with White House arm-twisting.... Twenty-five years later, during the 2008 presidential campaign, Mr. Obama’s main rivals, Hillary Rodham Clinton in the Democratic primaries and John McCain, the Republican nominee, cited the Greenspan Commission as the model for how they would address Social Security’s woes. Mr. Obama dismissed the idea.
I am willing to give the Marketplace and Money & Investing sections the benefit of the doubt. But it seems weird to me to say that I am now sequestering the OpEd pages AND much of the A section. Once the political motivations of the owner leave the Opinion pages, it is a slippery slope down towards yellow journalism.
3) Robert Skidelsky: The Bogey of Inflation:
How real is the danger of inflation for the world economy? Opinion on this matter is divided between conservative economists and official bodies like the IMF and OECD. The IMF and OECD project very low inflation rates.... Which view is right has big implications.... [A]s a result of the slump, capacity utilization is lower than it was 15 months ago: global output has declined by roughly 5% since 2008, and developed-country output by 4.1%. One would expect inflation to fall with the decline in output, and this is exactly what happened.... But what about the vast quantitative easing (printing of money) that has been occurring? Since the start of the crisis, the Bank of England has pumped $325 billion into the British economy, the Fed has expanded the US monetary base by close to $1 trillion, and the People’s Bank of China originated a record amount of $1.4 trillion in loans. These measures alone correspond to 4% of global GDP. Surely that means that inflation is just round the corner unless the money is withdrawn fast, right?
For those who have had a couple of lessons in the Quantity Theory of Money, this seems a plausible conclusion. The quantity theory states that the general price level will rise proportionately to the increase in the money supply. So if the money supply increased by 5% globally in the last year, world prices will rise by 5% after a short lag. But, as John Maynard Keynes never stopped pointing out, the Quantity Theory of Money is true only at full employment. If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output...
4) Bruce Bartlett: One Year Of Obama:
Does this mean I am happy with everything Obama has done in office? Of course not. I am sympathetic to the idea that the stimulus plan was too small and insufficiently front-loaded to turn the economy around. But on the other hand, the Republican idea that we should have done nothing or just cut taxes is nonsense.... The whole health reform effort has looked to me as if it was jury-rigged from day one, based less on a serious analysis of what needed to be done than about getting something--anything--through Congress that could be called health reform. I am disappointed that the idea of bending the cost curve has gotten short shrift, but I am even more disappointed that Republicans adopted the extraordinarily cynical strategy of defending Medicare from any cuts whatsoever.... [H]ealth reform, cap-and-trade, immigration reform and other issues that have occupied the president's attention could have been put off. One consequence is that reform of the financial sector, which is badly needed, has languished and been picked apart by industry lobbyists.... That said, I think Obama has done an adequate job in office his first year and given McCain's statements and actions, which show no remaining evidence of the independent streak he once exhibited, I have no reason to think we would be any better off if he had won. So I am comfortable with my vote and willing to give Obama the benefit of the doubt for a while longer.
5) Barry Eichengreen: Obamanomics: Year One and Beyond: Barack Obama... inherited a financial system on the verge of collapse... an economy in recession... a Congress and an economics profession with a tendency to confuse these real demons with imaginary ones.
His strength has been not to allow the perfect to become the enemy of the good. His $787 billion fiscal stimulus was good... too heavily tilted toward tax cuts... unaccompanied by a credible medium-term fiscal strategy.... But, having said all that, the stimulus package gave the economy a necessary shot in the arm. Obama’s efforts to stabilize the banking system, it almost pains me to acknowledge, succeeded despite themselves. I would have preferred bigger capital injections. I would have liked to see his administration use its leverage to replace the management responsible for creating the financial mess in the first place. But the stress tests and targeted TARP money, the path of least resistance taken, enabled the banks to earn their way back to solvency. However distasteful the uses to which those earnings have been put, they at least prevented the financial system from falling off a cliff....
The same middle-of-the-road approach can be taken in the second year.... Obama can use his State of the Union message to flesh out a bipartisan strategy for narrowing the budget deficit... reinstating pay-as-you-go rules... an independent commission to submit to Congress amendment-proof (and filibuster-proof) recommendations.... But Obama needs to provide stronger leadership on financial reform... the need for comprehensive financial reform is pressing... if the initial approach to financial reform doesn’t work, we face the prospect of another financial crisis every bit as serious as the last.... This is one area where Obama’s consensual instincts do not serve him well. He needs to use his bully pulpit. He needs to mobilize the general interest effectively...
6) Simon Johnson on the Banks: Off With Their Heads:
At the critical moment of crisis and rescue – from September 2008 to early 2009 – the Bush and Obama administrations blinked. There was no serious thought of deposing the bankers, who had helped to cause the crisis, or of breaking up their banks.... Ordinarily, if an industry plunges into crisis, you expect a serious shake-up.... The US treasury has for many years consistently advocated such principles... when other countries have got into trouble. But in the case of the US banking industry... pre-crisis executives in big banks have remained in place... little has changed in terms of risk-control practices, or remuneration. Why was the administration so conservative? Fear of a complete collapse of the banking system must have played some role.... In any case, the window of opportunity appeared to have been missed. As the measures taken to stabilize the economy began to work, the banks started to make money.... The administration did launch a modest regulatory-reform initiative in summer 2009, proposing new consumer protections and some measures to strengthen financial stability, but the measures were fought every inch of the way.... But, finally, after Massachusetts, it looks as if something important is happening...
7) The Financial Times Dislikes Volckerfest 2010:
Being cut off from trading securities for their own book will not stop banks from putting insured deposits at risk. Their inventiveness in finding ways to lose money knows no bounds, and the most time-honoured money-loser of all – making bad loans – remains available.... [T]he “Volcker rule” will not end the subsidies for the (many more) risks deposit-taking banks remain authorised to take. If it also prevents them from hedging those risks, it may make the banking system less, not more stable. Nor does the ban on proprietary trading do anything to protect the financial system from systemic dangers in its non-bank parts... many financial groups that do not take deposits... match... long-term illiquid assets with short-term liquid liabilities. This “shadow banking system” was the epicentre of the financial crisis. In the Lehman Brothers and AIG meltdowns, the equivalent of bank runs afflicted money market funds, repo markets and securities lending.... [T]hese alternative financing markets are huge... trillions of dollars each. If they stop functioning, financial stability is clearly in jeopardy. The key players in these markets, therefore, are ones governments still cannot allow to fail....
To cap market shares of non-deposit funding (as those of deposits already are) may be good for competition purposes. But a stabilising effect is unlikely: it forces the sector to leverage or deleverage in unison. And having many small banks did not save the US from a crippling wave of bank runs that plunged it into a Great Depression. For all its warts, a genuine effort at regulatory reform was wriggling its way through Congress – and at least a modicum of attention was being paid to co-ordinating such reforms at a global level. All this has now been blown out of the water by a White House seized by political panic. The result is that no one knows what will happen. A return to radical insecurity was the last thing we needed.
8) GRAPH OF THE DAY: Zheng Liu and Glenn Rudebusch: Inflation: Mind the Gap:
Figure 2 displays the inflation forecasts.... The Phillips curve model with the unemployment gap captures the large decline in the inflation rate for the period from the first quarter of 2008 to the third quarter of 2009. But the alternative model without the unemployment gap completely misses it. For the period from the fourth quarter of 2009 to the fourth quarter of 2010, the Phillips curve model suggests that inflation should continue to go down and remain low, as the unemployment rate is likely to remain high. In contrast, the alternative model without unemployment gaps predicts that inflation should remain elevated at around 2.5%.... [T]he Phillips curve produces substantially more accurate forecasts than does the alternative model without unemployment gap measures. The RMSE of the Phillips curve model is about 25% of that of the naive model without the gaps... because it takes into account the large increase in the unemployment rate as a signal for lower future inflation, whereas the alternative model ignores information from the unemployment gap.... Stock and Watson (2009)... argue that measures of economic activity such as unemployment gaps do not seem to help improve the accuracy of inflation forecasts in relatively tranquil periods, but do help forecast inflation in periods with large deviations of the unemployment rate from the NAIRU. In this sense, our findings do not contradict those in Atkeson and Ohanian (2001) and others, who focus on the sample period during which the U.S. economy experienced relatively tranquil business cycles, a period often referred to as the Great Moderation...
9) BEST NON-ECONOMICS THING I HAVE READ TODAY: John Cole: There Is Your Opening, President Obama:
Right here: ' A prominent Republican senator said Thursday that President Obama is seeking to spark “class warfare” with increasingly populist rhetoric and a series of regulatory measures aimed at Wall Street. “I think they think if they can create enough animosity toward Wall Street and corporate America, they get into this traditional sort of Democrat rhetoric and tap into the populist anger out there,” Sen. John Thune, South Dakota Republican, told The Daily Caller. “For Democrats to be successful they’ve got to create a sense of class warfare and an us versus them mindset.”'
They are so eager to defend Wall Street they are doing it pre-emptively. Unemployment is at 10%. People are angry. People are pissed about the bonuses and the bailout. Even Bob Shrum could figure this out. And, as a side note, this merely confirms what we already know- whenever the Republicans accuse someone of something, they are already doing it. Class warfare? Has he watched the GOP the last twenty years?
10) HOISTED FROM THE ARCHIVES: DeLong (2004): The Icy Breath of the Ghost of Andrew Mellon:
If domestic policies were perfect... there would be no crises.... [T]he Mexican government in 1994 undertook a six-month liquidity goosing of the economy in the runup to its presidential election. The Mexican government also undertook to boost its long-run credibility by offering its creditors the infamous Tesebonos--peso-denominated but dollar-indexed bonds. These two policy missteps produced the Mexican crisis of 1994-5--a crisis that was bad....
[But] policy is never perfect, and I at least certainly did not think before 1994 that it was a very bad thing for a government to be willing to offer its creditors inflation-indexed debt, or that a short pre-election monetary goosing was more than a minor sin against the gods of monetarism. Yet the gods of monetarism proved to be jealous gods: the punishment was swift and terrible.
To say that "crises are overwhelmingly domestic in origin" seems to direct our attention away from just what it is that makes the gods of monetarism such awful and jealous gods, and what relatively small changes to our international institutions might make the gods of monetarism kinder and gentler ones. Yes: the shocks that generate crises are primarily domestic, or at least the domestic elements are necessary prerequisites. But the propagation mechanisms are global and international.
I feel the icy breath of the ghost of Herbert Hoover's Treasury Secretary Andrew Mellon when we focus on the sins of the bankers and borrowers rather than the workings of the system.
