Economic Theory and Economic History
links for 2010-02-10

Five Pieces Worth Reading: February 10, 2010

1) Ryan Avent: Small Business:

What's the biggest problem? "Small business owners entered 2010 the same way they left 2009, depressed," said William Dunkelberg, NFIB chief economist. "The biggest problem continues to be a shortage of customers." That will tend to make life hard on a businessman. Of course, that biggest of problems won't be going away until the economy begins adding more jobs than it's destroying, and obviously small businesses aren't there yet. The Obama administration is betting that by creating an incentive to hire, it will change the math—firms will move from cutting jobs on net to adding jobs on net, which will increase the number of customers out there, which will, in turn, feed more hiring. Hopefully, that will be enough, but the proposed $33 billion looks awfully small given the 15 million unemployed.

2) Michael Derby: Fed’s Yellen: U.S. Rates Too Hot for China:

A top Federal Reserve official said Monday U.S. monetary policy is too hot for China and Hong Kong and explained any trouble those nations ultimately face because of this situation arises from their own foreign exchange policies. “Because both the Chinese and Hong Kong economies are further along in their recovery phases than the U.S. economy, current U.S. monetary policy is likely to be excessively stimulatory for them,” Federal Reserve Bank of San Francisco President Janet Yellen said. “However, as both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery,” she wrote in a bank Economic Letter published Monday. The central banker said that if China wants to prevent U.S. policies from overheating its economy and driving inflation, it will have to do something about its foreign exchange policy. “Increased exchange rate flexibility could mitigate growing inflationary concerns, and also act toward easing global imbalances and encouraging the development of the household sector, a shift the Chinese government now officially says it wants,” Yellen said.

3) Duncan Black:

Message: Focused On Jobs: It's the actual jobs that matter, not the trying to look like you're doing something on jobs. Realities of Congress, blah blah blah, but occasionally it'd be nice if that charismatic guy in the White House would try to move public opinion.

4) WORST ACT OF JOURNALISTIC MALPRACTICE I HAVE SEEN TODAY: Elisabeth Rosenthal of the New York Times misusing Roger Pielke as an expert on climate change. Outsourced to Ken Caldeira:

Does Roger Pielke Jr really believe that Pachauri is exaggerating the climate change problem in order to obtain more funds for his nonprofit research center? If Pielke is going to make insinuations in the New York Times about the ethics of Dr Pachauri, he owes it to us to make his beliefs clear. He should state clearly which of the following two statements he believes: (a) Dr Rajendra Pachauri is exaggerating the climate change problem in order to obtain more funds for his nonprofit research center. (b) Dr Rajendra Pachauri is not exaggerating the climate change problem in order to obtain more funds for his nonprofit research center.

For a man with a $49,000 salary, donating all of his consulting fees to nonprofit organizations would ordinarily be seen as a sign of professional integrity and dedication. It is outrageous that Pielke attempts to turn this around and use it to insinuate an ethical lapse. It makes one wonder about Pielke’s motives.

5) STUPIDEST THING I HAVE READ TODAY: James Buchanan: Economists Have No Clothes:

What function must the whole financial-monetary structure perform in an ideally working market economy? This question is relatively easy to answer. The financial-monetary structure must be neutral in its allocative effects. It must be limited to the facilitation of exchanges (to the reduction of transactions costs)...

If other economists have no clothes, then I suspect James Buchanan must have neither clothes, skin, organs, or bones. The financial-monetary sector does a lot more than facilitate exchange--a problem that was solved by the invention of coinage under Gyges King of Lydia 2800 years ago. The financial-monetary structure does facilitate exchange, but that is only one of its roles. Its major role is to transform the forms of wealth that exist in the economy into forms of wealth that savers want to hold. The forms of wealth that exist in the economy are long-term illiquid risky projects and organizations that require a good deal of supervision and oversight. The forms of wealth that savers want to hold are short-term liquid safe assets that can be left to manage themselves. To move from one to the other financiers must (a) find people tolerant of bearing risk, (b) people willing to monitor and oversee, (c) people to make markets to create liquidity, while (d) betting that the law of large numbers can keep the whole thing from crashing down as they try to maximize their profits by paying the minimum to outside risk bearers, monitors, and market-makers. "[N]eutral in its allocative effects... limited to the facilitation of exchanges," FEH!!