Ten Economics Pieces Worth Reading: January 30, 2009
1) Veronica Navarro EspinosaCurbing Irrational Exuberance: Brazil Tax May Encourage More Measures, Dennis Says:
Jan. 19 (Bloomberg) -- Brazil’s success in curbing the rally in the real by imposing a tax on foreigners’ purchases of stocks and bonds is a “scary” and “dangerous” precedent, said Citigroup Inc. equity strategist Geoffrey Dennis. The success of the tax may encourage officials to adopt more measures to stem the currency’s appreciation.... “It’s kind of scary because it might mean that the government wants to do more things over time should the currency stay strong,” Dennis said.
The real has weakened 3.1 percent against the dollar since the government implemented a 2 percent tax on the purchases of equity and fixed-income assets by overseas investors on Oct. 19. The currency surged 33 percent last year, the best performance among 16 major currencies tracked by Bloomberg, as an accelerating economic recovery and growing demand for commodities lured foreign investors to the country.
“Part of the success of the tax comes about because there’s an implicit threat by the government to actually increase the tax if the currency continues to appreciate,” Tony Volpon, a Latin America strategist for Nomura Holdings Inc., said at the conference. “The government has had a surprising success in putting the fear in the carry-trade community.” In carry trades investors borrow at a low interest rate to invest in markets where returns are higher, earning the spread between the cost of borrowing and the returns on their investment. Brazil’s benchmark lending rate is 8.75 percent, compared with the U.S. Federal Reserve’s near-zero target rate...
2) MR. JUSTICE "PLEASE DON'T PUT ANOTHER JEW ON THE COURT" McREYNOLDS: LABOR BOARD V. FRIEDMAN-HARRY MARKS CLOTHING CO., 301 U. S. 58 (1937): MR. JUSTICE McREYNOLDS delivered the following dissenting opinion.
MR. JUSTICE VAN DEVANTER, MR. JUSTICE SUTHERLAND, MR. JUSTICE BUTLER, and I are unable to agree.... We conclude that these causes were rightly decided by the three Circuit Courts.... The opinions there given without dissent are terse, well considered, and sound.... Considering the far-reaching import of these decisions, the departure from what we understand has been consistently ruled here... the obligation to present our views becomes plain.
The Court, as we think, departs from well established principles followed in Schechter Poultry Corp. v. United States, 295 U. S. 495 (May, 1935), and Carter v. Carter Coal Co., 298 U. S. 238 (May, 1936). Upon the authority of those decisions, the Circuit Courts of Appeals of the Fifth, Sixth, and Second Circuits in the causes now before us have held... the Act conferred upon the National Labor Relations Board no authority in respect of matters covered by the questioned orders.... Six District Courts, on the authority of Schechter's and Carter's cases, have held that the Board has no authority.... No decision or judicial opinion to the contrary has been cited, and we find none. Every consideration brought forward to uphold the act before us was applicable to support the acts held unconstitutional in causes decided within two years. And the lower courts rightly deemed them controlling...
3) Michael Woodford: Simple Analytics of the Government Expenditure Multiplier:
This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in New Keynesian models through a series of simple examples that can be solved analytically. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages; in a fairly broad class of simple models, the multiplier is 1 in the case that the monetary authority maintains a constant path for real interest rates. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in response to increases in inflation or real activity resulting from the fiscal stimulus. A large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates; in such a case, expected utility is maximized by expanding government purchases to at least partially fill the output gap that would otherwise exist owing to the central bank's inability to cut interest rates.
4) Ezra Klein: Rahm Emanuel makes me very pessimistic about health-care reform:
It is very, very, very important to be clear on what the death of health-care reform looks like. It is not a vote that goes against the Democrats. It is not an admission that the White House has moved on from the subject. It is continued statements of commitment from the key players paired with a continued stretching of the timetable. Like everything else in life, policy initiatives grow old and die, even if people still love them.
The timetable Emanuel is laying out makes little sense. The jobs bill will take some time. Financial regulation will take much longer. Let's be conservative and give all this four months. Is Emanuel really suggesting that he expects Congress to return to health-care reform in the summer before the election? Forgetting whether there's political will at that point, there's no personnel: Everyone is home campaigning.
Moreover, there's a time limit on health-care reform. The open reconciliation instructions the Senate could use to modify the bill expire when the next budget is (there's disagreement over the precise rule on this) considered or passed.
5) Mike Konczal: Fake Homeownership:
I saw an ad on craigslist (though most story that starts with that line are shady, this one is not especially so) for apartment rental opportunities in Sacramento, CA. The rent was very cheap, but you had to post a gigantic security deposit, sign away rights related to eviction and give proof that you’ve never been convicted of a crime. Digging a bit deeper, it was clear that the owner was an out of state company that was buying up sections of foreclosed homes in abandoned neighborhoods. And what they needed was less a “renter” but a controlled “squatter.” If left alone, these buildings would become homes for the homeless, gang activity, looters and pranksters, etc. So what the investment company wanted to do, since they wanted to sell the properties as homes in the long run but couldn’t in the short run, was get someone to squat in these buildings for them; they were looking to hire a respectable squatter, get him on the payroll through really cheap rent, and he or she who could do whatever in the building as long as it wasn’t destructive of value.
I think that’s a good metaphor for what homeownership is like with a regime of subprime loans. I like discussing this because it blurs the line of the ideals of homeownership of the late 20th century – a yeoman ownership society where nobody ever washes a rented car – with something more feudal. We’ve had this discussion before, but it only focused on the way up – what’s interesting now is we can begin to play with a theory of fake homeownership on the way down.
6) Michael Pomerleano and Andrew Sheng: A failure of public financial sector governance:
We are driven to the conclusion of Hyman Minsky that conventional wisdom and the “trend is your friend” invariably lead to complacency: “Stability leads to instability.” The cycle between greed and fear will be such that even if regulatory standards are toughened and independent systemic stability councils are put in place, fading memories of disasters will cause the public and policy makers alike to relax their vigilance, leading to the next crisis. The flawed public financial sector governance incentives that led to the present crisis have not been addressed in the prospective reform agenda. This article is intended to stimulate thinking and discussion about what can be done.
7) GRAPH OF THE DAY: The Failure of Okun's Law:
8) BEST NON-ECONOMICS THING I HAVE READ TODAY: Sam Stein: Obama Goes To GOP Lions' Den -- And Mauls The Lions:
President Obama traveled to a House Republican retreat in Baltimore on Friday and delivered a performance that was at once defiant, substantive and engaging. For roughly an hour and a half, Obama lectured GOP leaders and, in a protracted, nationally-televised question-and-answer session, deflected their policy critiques, corrected their misstatements and scolded them for playing petty politics. White House officials told the Huffington Post they were absolutely ecstatic. MSNBC's Luke Russert, who was on the scene in Baltimore, relayed that a Republican official and other GOP aides had confided to him that allowing the "cameras to roll like that" was a "mistake."
So effective was the president that Fox News cut away from the broadcast 20 minutes before it ended...
9) STUPIDEST THINGS I HAVE SEEN TODAY: The Dumb-as-a-Post Mike Pence (R-House) and the Underbriefed and Lazy Chris Matthews: Outsourced to Matthew Yglesias:
For an example of what I’m talking about with regards to dumb-as-a-post Representative Mike Pence, watch his answer to the question of what kind of compromise he would propose for health reform: “Well, look, you know, I was, uh, yeah, yeah, look, uh” Pence then pivoted away from addressing the issue to a kind of stammering evocation of the idea that the health insurance industry should be completely deregulated under the guise of allowing you to buy insurance across state lines. This, of course, is just a longstanding conservative proposal and not an idea for a compromise.... Chris Matthews didn’t... have the policy chops to dig deeper with Pence on the insurance regulation issue. But this is the point.... Pence’s proposal... is that one revenue-hungry state should cut a deal with insurers—move your headquarters’ to Sioux Falls (or just bribe enough state legislators) and we’ll let your lobbyists write whatever lax regulations you like. Then next thing you know everyone is “allowed” to buy this unregulated South Dakota health insurance and no other kind of insurance policies are available. This is what’s been done with the credit card industry and it’s the model that Pence wants to extent to health insurance...
10) HOISTED FROM THE ARCHIVES: DeLong (1999): Why We Should Fear Deflation:
After more than sixty years, deflation has reappeared as something to worry about. In the past six months major newspapers printed 438 articles classified under the keyword "deflation"--compared to 36 such in the first half of 1997 and 10 such in the first half of 1990. For sixty years, ever since the middle years of the Great Depression, next to no one had worried about deflation. Next to no one had seen actual falls in the price level as even a remote possibility. Now people do....
Given that deflation is back on the agenda, should it be feared?...
If the danger of deflation springs from its effect on net worth and depends on the degree of financial fragility in the economy, then economies may well have more to fear than declines in broad goods-and-services price indices alone. If securities and real estate holdings have been pledged as collateral for debt contracts, then large-scale asset price declines also trigger the confusion of macroeconomic events with entrepreneurial failure that makes deflation feared.
Is the United States today potentially vulnerable to large-scale asset price declines in this way? In real estate no. In the stock market yes. Perhaps fundamental patterns of equity valuation have truly changed, as investors have recognized that the equity premium over the past century was much too large--in which case stock prices have reached a permanent and high plateau. But it seems more likely that there are substantial risks of stock market declines on the order of fifty percent back to Campbell-Shiller fundamentals.
A second source of potential deflation-like pressure--seen during Sweden's exchange rate crisis of 1992, during Mexico's exchange rate crisis of 1994-5, during the East Asian crises of 1997, as well as in Great Depression-era events like the Austrian financial crises of 1931--arises out of large-scale foreign-currency borrowing by banks, companies, and governments in countries whose exchange rates then sharply depreciate.
Exchange rate depreciation is a standard reaction to a sudden fall in foreign demand for a country's goods and services exports (on the current account) or property (on the capital account). When demand for a private business's products falls, the business cuts its prices. When demand for a country's products falls, a natural reaction is for the country to cut its prices, and the most way to accomplish this is through exchange rate depreciation.
But if governments, banks, and non-financial corporations have borrowed abroad in hard currencies, depreciation writes up the home-currency value of their debts and impairs their balance sheets in the same fashion as conventional goods-and-services price index deflation.
We know that other countries certainly have been vulnerable to this form of financial market disruption. Is the U.S. vulnerable? Not today. U.S. gross external obligations of $7 trillion or so are overwhelmingly equity or dollar-denominated investments. But will they still be dollar-denominated come the end of the year 2000, when they will amount to perhaps $9 trillion, and when these gross obligations are part of a net investment position of more than -$2 trillion?...
