tag:blogger.com,1999:blog-74396281769854192932024-02-19T11:50:52.425-05:00Twenty-Cent ParadigmsA mostly macro- and international economics weblog for students (and anyone else!)Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.comBlogger724125tag:blogger.com,1999:blog-7439628176985419293.post-45114721358500588962017-02-19T22:59:00.001-05:002017-02-19T23:55:39.189-05:00Relax, Said the Night ManRecently, Bloomberg published a <a href="https://www.bloomberg.com/view/articles/2017-02-07/don-t-sell-the-euro-short-it-s-here-to-stay" target="_blank">Barry Eichengreen column headlined "Don't Sell the Euro Short. It's Here to Stay"</a>. He writes:<br />
<blockquote class="tr_bq">
Two forms of glue hold the euro together. First, the economic costs
of break-up would be great. The minute investors heard that Greece was
seriously contemplating reintroducing the drachma with the purpose of
depreciating it against the euro, or against a “new Deutsche mark,” they
would wire all their money to Frankfurt. Greece would experience the
mother of all banking crises. The “new Deutsche mark” would then shoot
through the roof, destroying Germany’s export industry.<br />
<br />
More
generally, those predicting, or advocating, the euro’s demise tend to
underestimate the technical difficulties of reintroducing national
currencies. </blockquote>
In the conclusion, he says "I argued that it is the roach motel of currencies. Like the Hotel
California of the song: you can check in, but you can’t check out." To be precise, that's true of the Roach Motel (see <a href="https://www.youtube.com/watch?v=z4c2gadmytg" target="_blank">here</a>, if you don't know what that's all about), but, <a href="https://www.youtube.com/watch?v=jFi2ZM_7FnM" target="_blank">according to the Eagles,</a> you can actually check out of the Hotel California, though you can never leave (hmm... sounds kind of like "Brexit"...).<br />
<br />
In any case, the fact it hangs together because eurozone members feel trapped by the costs of exit is hardly an affirmative case for the single currency. In Greece's case, its hard to believe that the costs of exit really would have been higher than the costs of staying; this <a href="https://ftalphaville.ft.com/2017/02/07/2184043/the-imf-implies-greece-should-have-the-left-the-euro-long-ago/" target="_blank">FT Alphablog post by Matthew Klein</a> pointed out this figure from the <a href="http://www.imf.org/en/Publications/CR/Issues/2017/02/07/Greece-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44630" target="_blank">IMF's Article IV report</a>:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOOOeezwQFrCqhzfVvb7va447xCDl7Nj9oDh37MrGn_3jB-0lBebj7Z4RkVboovt2E0CV8qMLAMYD-EBVYA4cp18nQ8mIgi2ZKSK18ck-n1eoup2YjckTHX4cJoAzxHljbvGWUiWYIcD8t/s1600/greece.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOOOeezwQFrCqhzfVvb7va447xCDl7Nj9oDh37MrGn_3jB-0lBebj7Z4RkVboovt2E0CV8qMLAMYD-EBVYA4cp18nQ8mIgi2ZKSK18ck-n1eoup2YjckTHX4cJoAzxHljbvGWUiWYIcD8t/s400/greece.jpg" width="400" /></a></div>
The <a href="http://www.imf.org/en/Publications/CR/Issues/2017/02/07/Greece-Ex-Post-Evaluation-of-Exceptional-Access-Under-the-2012-Extended-Arrangement-Press-44636" target="_blank">IMF also released a self-evaluation of its Greece program</a>, which <a href="http://voxeu.org/article/when-imf-evaluates-imf" target="_blank">Charles Wyplosz analyses in a VoxEU column</a>. See also: this <a href="https://www.ft.com/content/251f6dc6-f2a2-11e6-8758-6876151821a6" target="_blank">Martin Sandbu column</a> and this <a href="https://www.nytimes.com/2017/02/08/business/dealbook/worries-grow-over-euros-fate-as-debts-smolder-in-italy-and-greece.html" target="_blank">article by Landon Thomas</a>. <a href="https://www.washingtonpost.com/news/wonk/wp/2017/02/15/austerity-was-a-bigger-disaster-than-we-thought/?utm_term=.3ca6e3751766" target="_blank">Matt O'Brien's write-up</a> of research by House, Tesar and Proebsting of the impact of austerity in Europe is also relevant.<br />
<br />
The fact that the eurozone rolls on with no sign that a depression in one of its smaller constituent economies is enough to bring about a fundamental change is disturbing. It wouldn't be able to ignore an election of Marine LePen as President of France - <a href="https://www.ft.com/content/62233ec0-b130-3536-b84b-ffafd7960106" target="_blank">Gavyn Davies considers the consequences of that.</a><br />
<br />
Update: <a href="http://www.moneyandbanking.com/commentary/2017/2/12/the-future-of-the-euro" target="_blank">Cecchetti and Schoenholtz also had a good post on the implications of a LePen win</a>. Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com3tag:blogger.com,1999:blog-7439628176985419293.post-35956689274279449092017-02-08T00:51:00.000-05:002017-02-12T20:12:31.146-05:00Dodd-Frank Under FireOver the weekend, <a href="https://www.bloomberg.com/news/articles/2017-02-04/trump-cites-friends-to-say-banks-aren-t-making-loans-they-are" target="_blank">Bloomberg reported</a>:<br />
<blockquote class="tr_bq">
As he prepared to sign orders designed to roll back bank regulations
enacted to stop the next financial crisis, President Donald Trump said
that the rules are stifling lending.<br />
<br />
“We expect to be cutting a
lot out of Dodd-Frank, because frankly I have so many people, friends of
mine, that have nice businesses and they can’t borrow money,” Trump
said on Friday. “They just can’t get any money because the banks just
won’t let them borrow because of the rules and regulations in
Dodd-Frank."</blockquote>
While rolling back restrictions on the financial sector seems contrary to the Trump administration's populist veneer, it is consistent with what he said he would do during the campaign.<br />
<br />
We can expect more misleading rhetoric about "holding" capital, like this from former Goldman Sachs president Gary Cohn, who Trump has appointed director of the National Economic Council:<br />
<blockquote class="tr_bq">
“Every place a bank needs to hold capital and they need to retain
capital prohibits them from lending,” Cohn said in the interview. “So
we’re going to attack all aspects of Dodd-Frank.”</blockquote>
As the article (admirably) explains: <br />
<blockquote class="tr_bq">
Banks don’t actually “hold” capital. In banking, capital refers to the
funding they receive from shareholders. Every penny of it can be loaned
out. A 5 percent minimum capital requirement means that 5 percent of the
bank’s liabilities has to be equity, while the rest can be deposits or
other borrowing. The more equity a bank has, the smaller its risk of
failing when losses pile up.</blockquote>
On their blog, <a href="http://www.moneyandbanking.com/commentary/2016/12/5/better-capitalized-banks-lend-more-and-lend-better" target="_blank">Cecchetti and Schoenholtz summarize findings that higher capital</a> not detrimental to lending.<br />
<br />
Its not clear that Congress will undertake a full repeal of Dodd-Frank, but there are plenty of ways it can be weakened. <a href="https://www.brookings.edu/blog/up-front/2017/02/06/what-will-happen-to-dodd-frank-under-trumps-executive-order/" target="_blank">Brookings' Robert Pozen outlines</a> some of the things that may happen. At Vox, <a href="http://www.vox.com/2014/7/24/5930247/financial-reform-is-working" target="_blank">Matthew Yglesias argues</a> that Dodd-Frank has been successful. This <a href="http://www.rsfjournal.org/doi/full/10.7758/RSF.2017.3.1.02" target="_blank">paper by Martin Baily, Aaron Klein and Justin Schardin provides</a> a more detailed assessment of its provisions. <a href="http://johnhcochrane.blogspot.com/2017/02/dodd-frank-reform.html" target="_blank">John Cochrane has favorable views </a>of some of the Republican alternatives, though its far from certain that there will be action on them. <br />
<br />
The administration is also halting the Labor Department's "fiduciary rule," which requires investment advisors to act in the interest of their clients. <a href="http://www.businessinsider.com/trump-executive-order-on-fiduciary-rule-main-street-retirement-money-2017-2" target="_blank">Cohn's defense of this action</a> seems rather strained:<br />
<blockquote class="tr_bq">
"I don't think you protect investors by limiting choices," said Cohn, who previously was Goldman Sachs' COO.<br />
<br />
"We think it is a bad rule. It is a bad rule for consumers," <a href="https://www.wsj.com/articles/trump-moves-to-undo-dodd-frank-law-1486101602/">Cohn told The Wall Street Journal</a>.
"This is like putting only healthy food on the menu, because unhealthy
food tastes good but you still shouldn't eat it because you might die
younger."</blockquote>
See columns by <a href="https://www.nytimes.com/2017/02/06/opinion/trump-to-individual-investors-caveat-emptor.html?ref=opinion" target="_blank">Steve Rattner</a>, <a href="https://www.nytimes.com/2017/02/06/opinion/springtime-for-scammers.html" target="_blank">Paul Krugman</a> and <a href="https://www.nytimes.com/2017/02/04/opinion/trump-picks-wall-street-over-main-street.html?rref=collection%2Ftimestopic%2FFinancial%20Legal%2FRegulatory&action=click&contentCollection=timestopics&region=stream&module=stream_unit&version=latest&contentPlacement=6&pgtype=collection" target="_blank">Mike Konczal</a>.<br />
<br />
Overall, the administration's approach to financial regulation may have short-run benefits to the financial industry, and its not surprising that financial stocks largely drove the gains in the stock market after the election.<br />
<br />
Looser reins and more profits on Wall Street also likely mean bigger bonuses - before the crisis, financial industry compensation had been a substantial contributor to widening income inequality, and that trend seems likely to resume. <br />
<br />
Rolling back or watering down Dodd-Frank also will increase the likelihood of another financial crisis, which we should know all too well from recent experience can have severe negative effects on the economy as a whole - from January 2008 through December 2009, nonfarm payrolls dropped by 8.6 million before beginning an agonizingly slow recovery.<br />
<br />
Trashing the fiduciary rule and increasing the likelihood of future financial crises will also be detrimental to Americans' efforts to save for their retirements. While there's been a short-run boost to financial shares, overall, the risk of severe losses is increased, as is the likely proportion of savings that will be eaten up by fees. That is, Americans will be poorer and less financially secure in their old age.<br />
<br />
Populism, indeed.<br />
<br />
<b>Update (2/12):</b> <a href="http://www.cnbc.com/2017/02/09/dodd-frank-hensarling-memo-reveals-plan-to-scrap-bank-regulations.html" target="_blank">CNBC's Ylan Mui reports on efforts by Jeb Hensarling</a>, chair of the House Financial Services Cmte., to go after the CPFB. The NYT has an <a href="https://www.nytimes.com/2017/02/09/opinion/putting-clients-second.html" target="_blank">op-ed by Vanguard founder John Bogle on the fiduciary rule.</a> Meanwhile, at the Fed, <a href="https://www.nytimes.com/2017/02/10/us/politics/daniel-tarullo-federal-reserve.html" target="_blank">Daniel Tarullo, who has led efforts on regulation, is stepping down from the board,</a> <a href="https://www.bloomberg.com/news/articles/2017-02-10/financial-stocks-spike-on-fed-regulatory-chief-s-plan-to-resign?utm_content=markets&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social&cmpid%3D=socialflow-twitter-markets" target="_blank">causing financial stocks to jump</a>.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com2tag:blogger.com,1999:blog-7439628176985419293.post-77189218926050324132017-01-30T01:18:00.001-05:002017-01-30T01:18:26.259-05:00Economic Implications of the Immigration OrderThe most troubling aspects of President Trump's <a href="https://www.nytimes.com/2017/01/27/us/politics/refugee-muslim-executive-order-trump.html" target="_blank">immigration executive order</a> are the moral and national security implications (the later is outside my area of expertise, but its hard to see <a href="https://www.washingtonpost.com/world/middle_east/he-risked-his-life-working-for-the-us-in-iraq-now-his-visas-no-good/2017/01/29/29df611e-e63a-11e6-b82f-687d6e6a3e7c_story.html?postshare=351485716706661&tid=ss_tw&utm_term=.99d1ed44ed52" target="_blank">how betraying our friends</a>, <a href="http://www.wsj.com/articles/ban-could-hurt-u-s-iraqi-ties-diplomats-say-1485713137" target="_blank">alienating our allies</a> and handing an <a href="https://www.washingtonpost.com/world/national-security/jihadist-groups-hail-trumps-travel-ban-as-a-victory/2017/01/29/50908986-e66d-11e6-b82f-687d6e6a3e7c_story.html?hpid=hp_rhp-top-table-main_jihadist-groups-635pm%3Ahomepage%2Fstory&utm_term=.37afe3705013" target="_blank">easy propaganda victory to our enemies</a> advances the stated goal of protecting America).<br />
<br />
The economic implications are pretty bad as well. Although the order currently applies only to people from seven countries, the spectacle of people who've jumped through all the bureaucratic hurdles to get permission to come to the US being detained and turned away at airports by a sudden, incompetently planned and implemented policy change will no doubt deter many others from wanting to come.<br />
<br />
In the short run, making it less attractive to come to the US will hurt our tourism and education exports. In the longer run, it will harm our productivity by diminishing our universities, science, technology and human capital.<br />
<br />
One of Trump's stated economic concerns is the US trade deficit, which was -$499.5 billion in 2016 (2.7% of GDP), according to the BEA's advance estimate. While the US trade balance is negative in goods (-$770.5 billion) that is partly made up for by a $271.1 billion surplus in services.<br />
<br />
According to the ITA, <a href="http://travel.trade.gov/outreachpages/download_data_table/Fast_Facts_2015.pdf" target="_blank">the US had 77.5 million visitors in 2015</a>, and <a href="http://travel.trade.gov/outreachpages/download_data_table/2015_States_and_Cities.pdf" target="_blank">Colorado had 461,000</a>.<br />
<br />
Tourism is an important part of US service exports. 2016 figures aren't available yet, but in 2015, according to the BEA, $750.9 billion in service exports included $122.4 billion in "other personal travel" (i.e., non-business travel not related to health or education). <br />
<br />
The order won't only deter tourists; in addition to tourism, education services are another major US export. According to the <a href="http://www.iie.org/Services/Project-Atlas/United-States/International-Students-In-US#.WI5CjhBRpKY" target="_blank">Institute of International Education, there were just over 1 million international students enrolled</a> in US colleges and universities last year. In 2015, the US exported $35.8 billion of education-related travel, which includes tuition paid by international students.<br />
<br />
In addition to contributing to US GDP and exports, international students play a vital role in US higher education. At the undergraduate level, an important part of the experience is learning from one's peers - the presence of international students on our campuses enhances the educational opportunities for everyone.<br />
<br />
International graduate students play a significant role in the life of our research universities, particularly in the sciences (and economics!). The impact of the order was <a href="http://www.nature.com/news/meet-the-scientists-affected-by-trump-s-immigration-ban-1.21389" target="_blank">felt immediately by scientists</a> (see also <a href="https://www.theatlantic.com/science/archive/2017/01/trumps-immigration-ban-is-already-harming-americas-scientistsand-its-science/514859/" target="_blank">this story</a>). <a href="https://www.nsf.gov/statistics/2017/nsf17306/data/tab17.pdf" target="_blank">According to the NSF</a>, international students earn more than half of the doctorates granted in the US in mathematics and computer science and engineering and over one third in physical and earth sciences.<br />
<br />
The ability to attract hard-working, talented students from around the world is a source of strength for American university research and one of the reasons US institutions dominate <a href="https://www.timeshighereducation.com/world-university-rankings/2017/world-ranking#!/page/0/length/25/sort_by/rank/sort_order/asc/cols/stats" target="_blank">global rankings</a>. US leadership in many fields also means that many of the faculty in US institutions are immigrants and green card holders.<br />
<br />
<a href="https://www.washingtonpost.com/news/wonk/wp/2017/01/29/apple-would-not-exist-without-immigration-companies-at-trumps-tech-summit-react-to-his-travel-ban/?utm_term=.032af7f992c3" target="_blank">Technology companies have spoken out</a> about the impact of the immigration order on their workforces, but the impact will be more widespread - <a href="https://www.nsf.gov/statistics/seind14/index.cfm/chapter-3/c3s6.htm" target="_blank">according to the NSF</a>, 21% of the US science and engineering workforce is foreign born.<br />
<br />
If the grad students, post-docs, scientists and engineers who are so vital to our universities and industries find America a less appealing place to live and work - for example, if they have to worry that if they leave to visit relatives, they risk not being able to get back in - they have other options. The competition for talent is global, and this hands an advantage to non-US universities and businesses.<br />
<br />
America is great, but President Trump's order will make it less so.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-29270084169543595982016-10-24T23:37:00.000-04:002016-10-26T19:07:21.231-04:00Time for a Sterling Crisis?The UK pound plunged again earlier this month:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh98LdVh3kL6hax3pYf6nQbOBAcg5IdahZdGlJIw1N3wMb-pYebDx6PaK9QmyMAvPnq1FAYq1InGomJ2jPLsksvwJsZwWLaWd9oVCDcpCa_pfgconVAOVuf18HPxRvb4tpx5BBqlhplzlYf/s1600/pound.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh98LdVh3kL6hax3pYf6nQbOBAcg5IdahZdGlJIw1N3wMb-pYebDx6PaK9QmyMAvPnq1FAYq1InGomJ2jPLsksvwJsZwWLaWd9oVCDcpCa_pfgconVAOVuf18HPxRvb4tpx5BBqlhplzlYf/s400/pound.png" width="400" /></a></div>
two dates are marked with vertical lines: the the Brexit vote (red line) and the <a href="http://www.economist.com/news/leaders/21708724-fall-sterling-hints-how-painful-hard-brexit-would-be-taking-pounding" target="_blank">Prime Minister's speech signalling that the most likely outcome was a "hard Brexit</a>" (green line) where the UK leaves the European single market (i.e., that it won't become part of the European Economic Area, like <strike>Finland</strike>* Norway, or negotiate an arrangement like Switzerland's).<br />
<br />
Departure from the EU and the single market make the UK a less attractive location for foreign investment (see, e.g., <a href="https://www.theguardian.com/business/2016/aug/05/nissan-warns-sunderland-uk-car-plant-hinges-brexit-talks" target="_blank">comments from Nissan's CEO about its Sunderland plant</a>). A decrease in demand for UK assets implies a drop in the pound. The UK is also a less attractive location for domestic investment now as well, and the situation is probably not a good one for consumer confidence - a reduction in demand due to lower desired consumption and investment would imply lower interest rates, which also would cause the pound to fall.<br />
<br />
Is this yet another "sterling crisis"? Not in the usual sense - <a href="https://www.ft.com/content/661a37ba-0132-34f6-b07e-3ba549049f4d" target="_blank">as Gavyn Davies notes</a>, there is no fixed exchange rate to defend this time, and most of the UK's external debt is denominated in pounds.<br />
<br />
As <a href="http://krugman.blogs.nytimes.com/2016/10/11/notes-on-brexit-and-the-pound/" target="_blank">Paul Krugman explains</a>, a fall in the pound is a part of the adjustment process. He writes:<br />
<blockquote class="tr_bq">
But it’s important to be aware that not everyone in Britain is equally affected. Pre-Brexit, Britain was obviously experiencing a version of the so-called Dutch disease.
In its traditional form, this referred to the way natural resource
exports crowd out manufacturing by keeping the currency strong. In the
UK case, the City’s financial exports play the same role. So their
weakening helps British manufacturing – and, maybe, the incomes of
people who live far from the City and still depend directly or
indirectly on manufacturing for their incomes.</blockquote>
However, a rebalancing of the UK economy in favor of manufacturing exports will not come quickly, <a href="https://www.project-syndicate.org/commentary/small-uk-export-boost-since-brexit-vote-by-barry-eichengreen-2016-09" target="_blank">according to Barry Eichengreen</a> (<a href="https://www.project-syndicate.org/commentary/case-for-uk-import-substitution-by-robert-skidelsky-2016-10" target="_blank">Robert Skidelsky goes further</a> and argues for helping the process along through "import substitution" policies).<br />
<br />
One likely consequence is inflation, <a href="http://www.telegraph.co.uk/business/2016/10/22/inflation-next-years-ticking-time-bomb/" target="_blank">as Ambrose Evans-Pritchard writes</a>. Prices of imported goods will rise significantly (though the process of "exchange rate pass-through" generally occurs with a lag - the "<a href="https://www.washingtonpost.com/news/worldviews/wp/2016/10/13/british-supermarkets-are-running-out-of-marmite-brexit-just-got-real/" target="_blank">marmite row</a>" may have been a harbinger of things to come). The inflation will hit lower-income families especially hard, according to Evans-Pritchard's column, because the government has frozen some benefit payments, so inflation will cause their real value to fall. <br />
<br />
Rising costs for imports don't only impact consumers - they also affect producers. On the one hand, domestic producers benefit from increases in the relative prices of imported substitutes. On the other - and this is becoming more and more relevant in an age of global supply chains - prices of imported inputs (intermediate goods) will rise, increasing production costs.<br />
<br />
With the rise in cost of intermediate inputs and the greater costs of selling to its main trading partners, the impact of Brexit looks like a negative supply shock. Supply shocks create a nasty dilemma for monetary policy. Policy can "accommodate" the shock by allowing inflation to rise - doing so minimizes the increase in unemployment and helps keep output near its (diminished) potential. Or the Bank of England could tighten policy to keep inflation in check, with negative consequences for output and employment.<br />
<br />
The risk with accommodation is not just inflation itself, but a potential increase in inflation expectations and loss of the central bank's credibility. Part of the standard interpretation of 1970's stagflation is that the Fed was too accommodating after the 1973 oil shock, and which contributed to inflation expectations getting out of control.<br />
<br />
The Bank of England has a formal 2% inflation target; <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23" target="_blank">right now inflation is running below target</a>, but that will change.<br />
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I personally think its to Bank of England's credit that it's allowed inflation go above target at a couple of points during the turmoil of recent years. If their policy is credible, an occasional miss doesn't cause inflation expectations to rise. But the point of inflation targeting is to achieve credibility by meeting a stated target, so the BofE may be putting that at risk if it's always seen to be accommodating shocks.<br />
<br />
*corrected 10/26 Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com2tag:blogger.com,1999:blog-7439628176985419293.post-84355703779773138852016-09-04T10:59:00.000-04:002016-09-04T16:28:41.032-04:00Revisiting LehmanThe eighth anniversary of the bankruptcy of the Lehman Brothers investment bank is coming up later this month. It marked a point where the financial crisis, which had been simmering since summer 2007, seemed to go from bad to catastrophic.<br />
<br />
One indicator of financial stress that we were all watching closely at the time was the "TED Spread" - the difference between the 3-month LIBOR (a rate on interbank loans) and the yield on 3-month US Treasuries - essentially a measure of the risk premium paid by financial institutions, which is normally quite low.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgP2-sT-Wl5dRUJnFZ2p9-3ClWhvfo8AYgOmYZdS969vyq0NrDZBxFz6RCyiy3xzbXo1hzuvdLupZqrQfg0cmdLydLEKux3KJ7g7qL34Of3slAIvYUFvf3VBIqIVh4nNVoAPUryvarZ0jSd/s1600/lehman.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgP2-sT-Wl5dRUJnFZ2p9-3ClWhvfo8AYgOmYZdS969vyq0NrDZBxFz6RCyiy3xzbXo1hzuvdLupZqrQfg0cmdLydLEKux3KJ7g7qL34Of3slAIvYUFvf3VBIqIVh4nNVoAPUryvarZ0jSd/s400/lehman.jpg" width="400" /></a></div>
The blue line is drawn at Sept.15, 2008, the date of the Lehman Bankruptcy.<br />
<br />
The Fed creatively expanded its "Lender of Last Resort" toolkit during the crisis, creating a number of new lending programs. In March, it helped arrange the takeover of Bear Stearns by JP Morgan Chase.<br />
<br />
Monday-morning quarterbacking of the government's actions (both the Fed's the Treasury's) began immediately and has never really stopped (academic macroeconomists consider it part of our jobs, after all). One of the biggest questions has been why didn't Lehman Brothers get the same treatment as Bear Stearns?<br />
<br />
The Fed did try to arrange a takeover by a healthier firm - a potential deal with Barclays was <a href="http://www.reuters.com/article/barclays-lehman-idUSLDE62B25820100312" target="_blank">reportedly scuppered by British regulators</a> - but no deal was finalized in time. At the time, "moral hazard" concerns were prominent, and people felt the US government wanted to show that it was willing to let a financial institution fail. Lehman's troubles were well-known, so it was hoped that the financial disruption would be modest since everyone had time to prepare for its demise. More recently, officials have claimed that the Fed lacked the legal authority to rescue Lehman because it was truly insolvent - the intention of lender of last resort is to lend to illiquid banks, not insolvent ones (the Fed's loans are supposed to be backed by good collateral).<br />
<br />
Laurence Ball of Johns Hopkins has dug into the records and is questioning the argument that the Fed did all it could (and should) have. <a href="http://voxeu.org/article/fed-and-lehman-brothers" target="_blank">In a summary at VoxEU, he writes</a>:<br />
<blockquote class="tr_bq">
I conclude that officials’ explanation for the non-rescue of Lehman is incorrect, in two senses.<br />
First, a perceived lack of legal authority was not the reason for the Fed’s inaction; and<br />
Second, the Fed did in fact have the authority to rescue Lehman.<br />
I base these broad conclusions on several findings, given below.<br />
<ul>
<li>First, before the bankruptcy, Fed staff extensively analysed
Lehman’s liquidity risk and how the Fed might assist the firm. In the
record of these discussions, there is little concern about the adequacy
of Lehman’s collateral, and nobody suggests that legal issues might
preclude a Fed loan.</li>
<li>Second, arguments about legal authority made by policymakers since
the bankruptcy are unpersuasive. These arguments involve flawed economic
reasoning, such as confusion between the concepts of illiquidity and
insolvency. They also include factual claims that are not supported by
evidence. The Financial Crisis Inquiry Commission repeatedly asked Ben
Bernanke for details about Lehman’s collateral problem, but Bernanke was
unresponsive.</li>
</ul>
Further, from a de novo examination of Lehman’s finances, it is
clear that the firm had ample collateral for a loan to meet its
liquidity needs. In particular, I estimate that Lehman could have
survived with $88 billion of overnight lending from the Fed’s Primary
Dealer Credit Facility (PDCF), and the firm had at least $131 billion of
assets that were acceptable as PDCF collateral.</blockquote>
Ball's argument was also discussed in <a href="http://www.nytimes.com/2016/07/22/business/economy/pointing-a-finger-at-the-fed-in-the-lehman-disaster.html?_r=0" target="_blank">a column by James Stewart in the New York Times</a>.<br />
<br />
In a <a href="https://www.bloomberg.com/view/articles/2016-07-27/let-s-put-the-lehman-bailout-debate-to-rest" target="_blank">Bloomberg View column, Barry Ritholtz</a> disagrees with Ball's argument that Lehman was solvent, but, nonetheless, he thinks it <i>could have</i> rescued Lehman:<br />
<blockquote class="tr_bq">
As subsequent events have shown, most especially with the Fed-led
bailout of insurance giant American International Group, if there was a
will, there most certainly was a way. Given all of the various bailouts
of dubious legality, the Fed, Treasury and Congress most certainly could
have devised a rescue plan for the 158-year old bank. </blockquote>
Even though he thinks Lehman could have been rescued, on the question of whether it <i>should have</i>, Ritholtz disagrees with Ball and believes that the Fed was correct to let it go:<br />
<blockquote class="tr_bq">
No, Lehman Brothers did not “precipitate” the financial crisis. The
better metaphor is that Lehman was the first trailer in the park to be
destroyed by the tornado. Whether it lived or died was not going to stop
the financial forces that had been decades in the making and unleashed
when the credit bubble popped.<br />
<br />
I agree with Ann Rutledge, a
principal with New York-based R&R Consulting, and co-author of two
books on structured finance. She <a data-web-url="http://ritholtz.com/2011/03/drawing-the-correct-lessons-from-lehman-bros/" href="http://ritholtz.com/2011/03/drawing-the-correct-lessons-from-lehman-bros/">noted</a> “It wasn’t a mistake to let Lehman fail, it was a mistake to let it live so long.”</blockquote>
I haven't yet tackled <a href="http://No, Lehman Brothers did not “precipitate” the financial crisis. The better metaphor is that Lehman was the first trailer in the park to be destroyed by the tornado. Whether it lived or died was not going to stop the financial forces that had been decades in the making and unleashed when the credit bubble popped. I agree with Ann Rutledge, a principal with New York-based R&R Consulting, and co-author of two books on structured finance. She noted “It wasn’t a mistake to let Lehman fail, it was a mistake to let it live so long.”" target="_blank">Ball's monograph</a> - perhaps that would be a good project for my Money and Banking students in block 5...Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-67057482656905664682016-07-17T01:41:00.000-04:002016-07-17T14:55:15.721-04:00Lies, Damned Lies and Ireland's GDPBeing an academic economist can be humbling - while it involves learning lots of esoteric stuff, it also makes one much more aware of how much one doesn't know. But <a href="https://www.youtube.com/watch?v=AR8D2yqgQ1U" target="_blank">I know this much is true</a>: the total amount of goods and services produced in Ireland did not increase by 26.3% in 2015.<br />
<br />
But that's <a href="http://www.cso.ie/en/releasesandpublications/er/nie/nationalincomeandexpenditureannualresults2015/" target="_blank">what Ireland's Central Statistics Office has reported</a>. It's not entirely clear how they came to such a (literally) incredible figure for real GDP growth. The expenditure approach to calculating GDP adds up purchases of new final goods and services in four categories - consumption (C), investment (I), government purchases (G) and net exports (NX). I took the data from table 6 of their release and normalized each component to 100 in 2010 to illustrate how the change is driven by large jumps in I and NX.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFK2W7sVzkbHPcrGqvab7OmG9iRaYFexQDviXq5PPXDC00iCxprqFCSwiGokePxX1zAM6Uw5dIm5oywwNdlg44ODcpoLbAk0bKtrsjfpBEUnZBPw1j8-okli2lTgCfR8MRuV-n2EXR_hKw/s1600/ireland.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFK2W7sVzkbHPcrGqvab7OmG9iRaYFexQDviXq5PPXDC00iCxprqFCSwiGokePxX1zAM6Uw5dIm5oywwNdlg44ODcpoLbAk0bKtrsjfpBEUnZBPw1j8-okli2lTgCfR8MRuV-n2EXR_hKw/s400/ireland.jpg" width="400" /></a></div>
<a href="http://www.nytimes.com/2016/07/13/business/dealbook/ireland-us-tax-inversion.html" target="_blank">News reports</a> have focused on activities of multinational corporations, particularly on "inversions" which involve transferring their legal headquarters to Ireland in order to take advantage of its low corporate tax rates.<br />
<br />
That may be correct, but its not an entirely satisfying explanation. GDP is supposed to measure the value of goods and services produced in a country. The legal domicile of the corporations producing it is irrelevant. Ownership of capital - both physical machinery, equipment and structures and also intangible forms (intellectual property, etc.) - also is irrelevant, so the fact that multinational corporations like to hold IP in Ireland for tax reasons shouldn't matter in principle.<br />
<br />
Gross National Product (GNP) adds up the total value of goods and services produced with resources owned by a country's citizens. Since many multinational corporations operate in Ireland, it has higher GDP than GNP because some of its GDP is produced using foreign-owned capital - the same data release showed a shocking increase of 18.7% in Ireland's GNP last year. <br />
<br />
The information released by the CSO is not very detailed. The <a href="http://ftalphaville.ft.com/2016/07/14/2169550/placing-irelands-economic-recovery-in-context/" target="_blank">FT Alphaville's Matthew Klein</a>, <a href="http://www.bloomberg.com/view/articles/2016-07-12/ireland-s-misleading-growth-spurt" target="_blank">Bloomberg Columnist Leonid Bershidsky</a>, and <a href="http://www.irisheconomy.ie/index.php/2016/07/12/economy-expands-by-26-3/" target="_blank">Seamus Coffey at the Irish Economy blog</a> have made useful attempts at sorting things out.<br />
<br />
Clearly, the way the CSO is calculating GDP is failing to correspond to the concept. Statistical agencies need to provide estimates calculated in a consistent fashion, so it wouldn't have been appropriate for them to suddenly decide to calculate it differently because they got a strange number. But the methods for estimating GDP are not etched in stone. If legal and accounting maneuvers of multinationals are distorting some of their source data, they need to find a way of correcting for it. Standards for national accounts are coordinated internationally and it is not clear whether the problems in this report are due to something the CSO is doing or a more general methodological issue which happens to be most apparent because of Ireland's unique circumstances.<br />
<br />
Statistical agencies update their methods and revise their estimates regularly - e.g., in 2013, the US BEA did a "comprehensive revision" that began the treatment of development of intellectual property as a component of investment (see <a href="http://twentycentparadigms.blogspot.com/2013/08/gdp-tng.html" target="_blank">this earlier blog post</a>). I hope the CSO will release more information to help everyone better understand what's gone wrong with their figures. That will be a first step towards correcting the method used to estimate GDP and producing a revised set of figures - one which will not show a 26% increase in real GDP in 2015.<br />
<br />
Update: <a href="http://www.independent.ie/opinion/columnists/colm-mccarthy/cso-made-look-silly-for-sticking-to-the-rules-34889720.html" target="_blank">Procedures mandated by Eurostat are mostly to blame, writes Colm McCarthy</a>. Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com2tag:blogger.com,1999:blog-7439628176985419293.post-38031203432035963872016-04-19T00:13:00.000-04:002016-04-19T00:13:39.688-04:00Hysteresis in a New Keynesian ModelI've posted a draft of my research paper, "<a href="https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnx3ZGNyYWlnaGVhZHxneDozYzZlY2JlMzZjYzljNGNj">Hysteresis in a New Keynesian Model</a>" on my website. The paper proposes a way of modelling hysteresis and integrates it into a New Keynesian macro model.<br />
<br />
The widely noted rightward shift of the Beveridge curve relationship can be interpreted as evidence of less efficient matching between employers and workers in the labor market<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRxQLvWi1kbNM4qkJMWFncT1N8KPKa76HF0KhCsAhBZti_MmSP-rfQaiV6qPayx7NeXa33mURKcAGlchyphenhyphenRIMXm6uhp47xZryco0vbhXKnalAOvW8jKbl8uXOUVkVdiWR51pE_sCm2no-V0/s1600/bevcurve.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="267" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRxQLvWi1kbNM4qkJMWFncT1N8KPKa76HF0KhCsAhBZti_MmSP-rfQaiV6qPayx7NeXa33mURKcAGlchyphenhyphenRIMXm6uhp47xZryco0vbhXKnalAOvW8jKbl8uXOUVkVdiWR51pE_sCm2no-V0/s400/bevcurve.jpg" width="400" /></a></div>
<br />
In the paper, I argue that less-efficient matching is related to the increased duration of unemployment spells seen during the last recession and its aftermath. There are several reasons why matching may be less efficient with a higher proportion of long-term unemployed:<br />
<ol>
<li>a loss of information as workers' informal networks may dry up over time</li>
<li>a stigma associated with long-term unemployment (i.e., it acts as a negative signal)</li>
<li>decreased search effort by long-term unemployed</li>
</ol>
I cite empirical evidence for (2) and (3) in the paper. The paper does not take a stand on the mechanism causing the relationship between matching efficiency and duration of unemployment.<br />
<br />
The model includes a Diamond-Mortensen-Pissarides search-and-matching labor market framework, where hires (H) are a function of the number of vacancies (V) posted by firms and unemployed (U) workers<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuUqwnTD60MvK0hr3DOrNLHqh2BAqxu4iC4h3KgwnQBsKzNxoKN4g-_Hcw7VSbIR4pzNe1sirnlTIJ3U8NW63UwFQokRREZ3AcUTpVMd5tVU3YJnl1imEA-IDOwUhmDpEjBYEFvQGD3GgX/s1600/matching.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuUqwnTD60MvK0hr3DOrNLHqh2BAqxu4iC4h3KgwnQBsKzNxoKN4g-_Hcw7VSbIR4pzNe1sirnlTIJ3U8NW63UwFQokRREZ3AcUTpVMd5tVU3YJnl1imEA-IDOwUhmDpEjBYEFvQGD3GgX/s1600/matching.jpg" /></a></div>
Hysteresis is modeled with the assumption that matching efficiency (A) is a decreasing function of the average duration of unemployment spells.<br />
<br />
Rearranging the matching function to solve for efficiency (and setting alpha to 0.5), we can see that a decrease in efficiency coincides with the increase in the duration of unemployment spells<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvgv9zQ_7uqyyD1N-CH447aiVsuarirkwl8gTo0bDOpgWMKXZCia8DUY8pVo5Vayfjk-cROnNw4Bqs-yPGBw8rGp20svIqLYPAa81YjA9wujEuZJ5Vmw30CEMwK1av2EHQCsN04N8Im7Mf/s1600/efficiency.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="257" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvgv9zQ_7uqyyD1N-CH447aiVsuarirkwl8gTo0bDOpgWMKXZCia8DUY8pVo5Vayfjk-cROnNw4Bqs-yPGBw8rGp20svIqLYPAa81YjA9wujEuZJ5Vmw30CEMwK1av2EHQCsN04N8Im7Mf/s400/efficiency.jpg" width="400" /></a></div>
<br />
With hysteresis, the response of unemployment to a negative productivity shock is smaller initially but more persistent, as shown by the impulse response functions:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSkVGmfJxo99DSEOQfzQFxLFb193WGQf5S4bfs4ixvXrkSsk5_0LCJYFk9s9QY8KZk-TRoaf-0xgVOCu2DZukuTQIJQj6UHdhJGC7yuvIiZayszMqEGvh0v4eF-ZH84Zfv7LQX7uAf1DqH/s1600/uneployment+irf.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="278" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSkVGmfJxo99DSEOQfzQFxLFb193WGQf5S4bfs4ixvXrkSsk5_0LCJYFk9s9QY8KZk-TRoaf-0xgVOCu2DZukuTQIJQj6UHdhJGC7yuvIiZayszMqEGvh0v4eF-ZH84Zfv7LQX7uAf1DqH/s400/uneployment+irf.jpg" width="400" /></a></div>
The reason for this is that, in the absence of hysteresis, firms can adjust their labor by sharply decreasing their vacancy posting. With hysteresis, the response of vacancies is less dramatic because firms take into account the fact that hiring will be more difficult in the future due to the decline in matching efficiency.<br />
<br />
The model also considers demand shocks, which take the form of shocks to the discount factor, and monetary shocks (deviations from the Taylor rule), with similar results. Overall, hysteresis acts as a mechanism that increases the persistence of the response of macroeconomic variables to shocks. Since macro models struggle to generate endogenous persistence, this may be one of the main selling points of the paper.<br />
<br />
Hysteresis also generates movements in the "natural rate" of unemployment, which I proxy by computing the amount of unemployment that would occur if wages and prices were flexible, taking as given the evolution of matching efficiency (A) from the baseline model. The green line shows the change in the natural rate in response to a negative productivity shock:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjC6Je31ieOaRjPiQdqBTI7TEiBBBIpxM4OaPEz6YwZSU7AsRZhtJmSQm4KK8_pN3CvJvXb9mxVVF1km0NDrq-UyuaGXUg2iIONrgZqiiyY9HiU8tr_UzELHmeOoLU5ITPwvoEcfofanmiS/s1600/natrate.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="273" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjC6Je31ieOaRjPiQdqBTI7TEiBBBIpxM4OaPEz6YwZSU7AsRZhtJmSQm4KK8_pN3CvJvXb9mxVVF1km0NDrq-UyuaGXUg2iIONrgZqiiyY9HiU8tr_UzELHmeOoLU5ITPwvoEcfofanmiS/s400/natrate.jpg" width="400" /></a></div>
Note: this is a revised version of the draft circulated last fall as my "job market paper".Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com4tag:blogger.com,1999:blog-7439628176985419293.post-83459281454021918822016-03-01T21:00:00.001-05:002016-03-01T21:04:27.112-05:00Carbon TaxesAs an economist, one of the biggest frustrations of discussions over climate policy is that we know pretty well what to do - tax carbon (or set up a system of tradable permits, which has similar effects), and that doing so will not be harmful to the economy. People and firms respond to incentives, and a carbon tax will motivate people to find the lowest-cost ways to reduce emissions. People are clever and the cost of reducing emissions will likely be much less than many envisioned.<br />
<br />
<a href="http://www.nytimes.com/2016/03/02/business/does-a-carbon-tax-work-ask-british-columbia.html?smid=tw-share">Eduardo Porter's column about British Columbia's carbon tax</a> is yet another illustration of this; he writes: <br />
<blockquote class="tr_bq">
<div class="story-body-text story-content" data-para-count="403" data-total-count="1058" id="story-continues-3" itemprop="articleBody">
In
2008, the British Columbia Liberal Party, which confoundingly leans
right, introduced a tax on the carbon emissions of businesses and
families, cars and trucks, factories and homes across the province. The
party stuck to the tax even as the left-leaning New Democratic Party
challenged it in provincial elections the next year under the slogan Axe
the Tax. The conservatives won soundly at the polls.</div>
<div class="story-body-text story-content" data-para-count="403" data-total-count="1058" id="story-continues-3" itemprop="articleBody">
<br /></div>
<div class="story-body-text story-content" data-para-count="245" data-total-count="1303" itemprop="articleBody">
Their
experience shows that cutting carbon emissions enough to make a
difference in preventing global warming remains a difficult challenge.
But the most important takeaway for American skeptics is that the policy
basically worked as advertised.</div>
<div class="story-body-text story-content" data-para-count="245" data-total-count="1303" itemprop="articleBody">
<br /></div>
<div class="story-body-text story-content" data-para-count="159" data-total-count="1462" itemprop="articleBody">
British
Columbia’s economy did not collapse. In fact, the provincial economy
grew faster than its neighbors’ even as its greenhouse gas emissions
declined.</div>
<div class="story-body-text story-content" data-para-count="159" data-total-count="1462" itemprop="articleBody">
<br /></div>
<div class="story-body-text story-content" data-para-count="271" data-total-count="1733" itemprop="articleBody">
“It
performed better on all fronts than I think any of us expected,” said
Mary Polak, the province’s environment minister. “To the extent that the
people who modeled it predicted this, I’m not sure that those of us on
the policy end of it really believed it.”</div>
</blockquote>
Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-46454280995579493062016-02-08T00:44:00.000-05:002016-02-25T10:56:06.360-05:00Productivity PessimismI'm hoping I'll have a chance to read <a href="http://press.princeton.edu/titles/10544.html">Robert Gordon's new book</a> soon, though one of the ironies of being a college professor is that the job doesn't seem to leave much time to read. Fortunately, Gordon presents a condensed version of the argument in a <a href="http://www.bloombergview.com/articles/2016-01-26/u-s-unlikely-to-see-rapid-tech-fueled-growth-in-future">recent Bloomberg View column,</a> where he explains that he doesn't expect a return to the rapid productivity growth of the mid-20th century. He writes:<br />
<blockquote class="tr_bq">
The 1920-70 expansion grew out of the second industrial revolution, when
fossil fuels, the internal-combustion engine, advanced metals and
factory automation came together to produce electric lighting, indoor
plumbing, home appliances, motor vehicles, air travel, air conditioning,
television and much longer life expectancy. </blockquote>
The "third industrial revolution" - computers and the internet - is less significant, in his view:<br />
<blockquote class="tr_bq">
Although revolutionary, the Internet's effects were limited when
compared with the second industrial revolution, which changed
everything. The former had little effect on purchases of food, clothing,
cars, furniture, fuel and appliances. A pedicure is a pedicure whether
the customer is reading a magazine or surfing the web on a smartphone.
Computers aren't everywhere: We don’t eat, wear or drive them to work.
We don't let them cut our hair. We live in dwellings that have
appliances much like those of the 1950s and we drive in motor vehicles
that perform the same functions as in the 1950s, albeit with more
convenience and safety.</blockquote>
Our main measure of technological progress is total factor productivity (tfp) growth, which is sometimes called the "Solow residual" because it is calculated as a leftover, by subtracting from output growth the portions that can be explained by changes in capital and labor. That is, it is the growth that would occur even if there was no change in the factors of production.<br />
<br />
Turning points in tfp growth can be hard to identify because the data are somewhat volatile from year-to-year and have a cyclical component. With hindsight, economists identified a productivity slowdown around 1973 and a resurgence - with information technology playing a leading role - in the mid-1990s. However, tfp growth has generally been weak since 2005, raising the question of whether the IT-led productivity boom is over.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEil2rkI-N7ZoHSSgq6IX1hmtprenzqJbltAzk7TQqhsxmd5Rvya3rTWeseTScazRSPj3-NjtLeO_JwE03ubCM3HmARAfQBRxPYA-2CdsqWdbaFxlkQYwSaXPlbz7KqFyVXm9F7kyNALiKy9/s1600/tfp.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="292" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEil2rkI-N7ZoHSSgq6IX1hmtprenzqJbltAzk7TQqhsxmd5Rvya3rTWeseTScazRSPj3-NjtLeO_JwE03ubCM3HmARAfQBRxPYA-2CdsqWdbaFxlkQYwSaXPlbz7KqFyVXm9F7kyNALiKy9/s400/tfp.jpg" width="400" /></a></div>
<div style="text-align: center;">
Data: <a href="http://www.bls.gov/mfp/">Bureau of Labor Statistics </a></div>
<br />
This <a href="http://www.frbsf.org/economic-research/publications/economic-letter/2015/february/economic-growth-information-technology-factor-productivity/">San Francisco Fed Letter</a> from last year discusses some of the reasons for the productivity slowdown. Gordon's book was the subject of an <a href="http://www.nytimes.com/2016/01/20/business/economy/a-somber-view-of-americas-pace-of-progress.html">Eduardo Porter column</a> and a <a href="http://www.nytimes.com/2016/01/31/books/review/the-powers-that-were.html?_r=0">Paul Krugman review</a>.<br />
<br />
<b>Update (2/25):</b> In an <a href="http://www.vox.com/2016/2/24/11100702/bill-gates-energy">interview with Ezra Klein, Bill Gates argues against Gordon's view</a>. Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com5tag:blogger.com,1999:blog-7439628176985419293.post-66005007108345859542015-12-02T21:49:00.000-05:002015-12-02T21:49:10.285-05:00Fight for Our Principles!Principles of Macroeconomics, that is, since it is under attack from Noah Smith, who argues for eliminating introductory macroeconomics classes. In a <a href="http://noahpinionblog.blogspot.com/2015/11/why-teach-kids-macro-at-intro-level.html">blog post, he writes</a>:<br />
<blockquote class="tr_bq">
Why should undergrads learn macro in their first year of econ? If they
go on to be econ majors they can easily start out with intermediate
macro and not miss anything important. If they just take the first-year
econ sequence and then go into the business world, what do they really
need to know?</blockquote>
I think this badly misunderstands what we're trying to accomplish in a introductory level course - principles of macroeconomics is not about preparing students for business careers (though business students certainly should take it - as should everyone else). The two main benefits of taking an introductory macroeconomics course are:<br />
<br />
First, it prepares students to be more knowledgeable and effective citizens. Among other things, students come away from the class able to interpret data like unemployment, inflation and GDP that they read about in the news. They learn some basic facts about taxation and government spending that can help them evaluate claims made by politicians. The Federal Reserve is pretty mysterious to most people - students learn what it does and how monetary policy works and the basics of how a banking/financial crisis can occur. This seems particularly valuable in a time when the Fed is facing political criticism which is at least partly based on its widely misunderstood response to a financial crisis.<br />
<br />
Second, working with economic models develops thinking and mathematical skills. Smith makes the point that the models we teach in an intro class have their flaws (as do the models we teach in PhD-level classes...), though I still think they're quite useful for thinking about a number of issues. But the act of manipulating a model and working out how assumptions are linked to conclusions helps students become sharper thinkers, and this stays with them long after they've forgotten the specifics of any particular model.<br />
<br />
At my current station, I'm teaching a <a href="https://44c5ce16-a-62cb3a1a-s-sites.googlegroups.com/site/wdcraighead/Econ%20110%20Syllabus%20Outline%20Spr%2015.pdf?attachauth=ANoY7coLN4k3PKyPhAtgU0SKdzhAnRBb1NgSoLY4zhFq3b7njM-NyA9xv3kwAzdHYGYjYJ76zf--bFyNenmSgGZhkW65IQfb3JZxHkBHFx2H6cF7CepkfnuFkrAq44xDfaY3sJABaF3jFE0xrbx7KHu_a6K4hxSQrYUnAHCE5DGFi4Xp1pb0As5ZNgnVu6jJkPJNJgMCsR9NrcckQosHLU-eNf8UmkgjtAW1A69Xmwdaepe1tx2JR7M%3D&attredirects=0">one-semester introductory course</a> that covers both micro and macro topics, but I had a full-semester macro principles course at my previous stop - an <a href="https://44c5ce16-a-62cb3a1a-s-sites.googlegroups.com/site/wdcraighead/Macro-Principles-MU-Spring-08.pdf?attachauth=ANoY7coAYMGPzJnH1FBBTCy2YXkdxzZ2KAyIW227jbhHfPKJvfyNXNy_3crglQxhbzIAscMkVpM4G-ISVYbMfLGAqkOVZaD_F26DU4gc6CJbD_C2Af_tNGH2dPwy_-3cVMxUolBS5-9JqhN9u6RvEMFQj2O6Ec6zDm4AzPTMY_h0ocOAE5epFtPTWOlJfkXRbbUMR1y8ylK4AUvSLhC1BdP9EVLvMPV7Z6SQ2QfY3lhkze0MFWLRh_c%3D&attredirects=0">outline of what I did is posted here</a>. The time students have in college is a very scarce resource, and the opportunity cost of any college class is very high, but I think principles of macroeconomics is almost always a good choice. Though perhaps I'm a little biased...Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com1tag:blogger.com,1999:blog-7439628176985419293.post-46123066685978145622015-11-15T19:48:00.002-05:002015-11-15T20:23:27.799-05:00Hysteresis and Monetary PolicyIn the Washington Post last week, <a href="https://www.washingtonpost.com/news/wonk/wp/2015/11/03/larry-summers-advanced-economies-are-so-sick-we-need-a-new-way-to-think-about-them/">Larry Summers wrote about some new research</a> finding evidence of "hysteresis." This is a term borrowed from the natural sciences for when temporary occurrences have lasting effects - e.g., when you hold a magnet up to a piece of metal, the metal remains magnetized even after you remove the magnet. In macroeconomics, hysteresis occurs when an economic downturn has a lasting effect on economic capacity (i.e., reduced "potential output"); that is, <a href="http://krugman.blogs.nytimes.com/2015/11/03/demand-creates-its-own-supply/">lack of demand creates its own lack of supply</a>.<br />
<br />
Hysteresis could occur through a number of channels. Consider an economy described by an aggregate production function Y* = AF(K,N*) where potential GDP (Y*) depends on productivity (A), capital (K) and labor at its "natural" or "full-employment" level, N*. A recession occurs when output falls below Y* and labor is below N* (i.e., there is unemployment in excess of the "natural rate"). Hysteresis implies that there is a lasting impact on Y* - this could occur through technology, capital or labor.<br />
<br />
All three channels could be operative. In the past several years, <a href="http://www.bls.gov/news.release/archives/prod3_06232015.htm">productivity growth has been sluggish</a>, though its not clear if this is linked with the recession (productivity trends are always somewhat mysterious). The recovery of investment (the rate of flow into the stock of capital) from the recession has been less than spectacular, even taking out housing - the <a href="https://research.stlouisfed.org/fred2/series/A008RE1Q156NBEA">share of GDP devoted to nonresidential fixed investment</a> is somewhat below its peak in previous expansions. <br />
<br />
Here, I want to focus on labor, where the hysteresis effects are pretty evident, and raise an interesting policy dilemma. <br />
<br />
Although the unemployment rate has fallen to what we might consider a reasonably healthy level of 5% (the normal turnover of a healthy labor market generates some unemployment so we never expect it to get to zero), the labor market still clearly bears the scars of the 2008-09 recession.<br />
<br />
The duration of unemployment spells rose to unprecedented levels and has remained elevated (a useful comparison is to the 1981-82 recession - the unemployment rate peaked at 10.8% at the end of 1982, but the dynamics of duration were not nearly as severe).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi59paLfpsOtyyPZg-dYKUKI5WKX6K-PwC4JH3ZaA7zA6OuCF3eJgkWBX_0NG9YOB-57c_n0P5AANP9_88iT6WeAQQVJCbJed5UO2yjFfQ8YZNQXGFfs6Db6C9O36PXzXs14fANx47VzTRQ/s1600/duration.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi59paLfpsOtyyPZg-dYKUKI5WKX6K-PwC4JH3ZaA7zA6OuCF3eJgkWBX_0NG9YOB-57c_n0P5AANP9_88iT6WeAQQVJCbJed5UO2yjFfQ8YZNQXGFfs6Db6C9O36PXzXs14fANx47VzTRQ/s400/duration.jpg" width="400" /></a></div>
People with spells of long-term unemployment have a <a href="http://qje.oxfordjournals.org/content/early/2013/04/16/qje.qjt015">harder time finding jobs</a>. But looking at the unemployed leaves out those who left the labor force entirely. The last several years have seen a significant drop in labor force participation rates, even among people aged 25-54 (focusing on this group is a rough way to control for the drop in overall participation due to an aging population, though as this <a href="http://www.calculatedriskblog.com/2015/03/why-prime-labor-force-participation.html">Calculated Risk post notes</a>, there is a composition effect even within the 'prime age' group).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWZWzzla_f3PdGJdH5jxelhyaz2s_ytCFuOaW3skHssHddp2Ty6s_eOjsKWvNQJXfUZEUg9tARUUiH8fcgPhlnADKgNxDa5c8lbeNRWEO62kSHBK5i3vzaxAZlfsA4RREWMpEAcMHUYcsW/s1600/participation.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWZWzzla_f3PdGJdH5jxelhyaz2s_ytCFuOaW3skHssHddp2Ty6s_eOjsKWvNQJXfUZEUg9tARUUiH8fcgPhlnADKgNxDa5c8lbeNRWEO62kSHBK5i3vzaxAZlfsA4RREWMpEAcMHUYcsW/s400/participation.jpg" width="400" /></a></div>
The labor market clearly is not as robust as the headline unemployment rate suggests.<br />
<br />
What are the implications for monetary policy of having a high proportion of long-term unemployed, and possibly a substantial latent group of unemployed who have left the labor force? One answer is suggested by this <a href="https://www.stlouisfed.org/on-the-economy/2015/november/how-tight-labor-market">St Louis Fed blog post by Stephen Williamson</a>:<br />
<blockquote class="tr_bq">
[I]f we think of the long-term unemployed as being subject to the mismatch
problem and highly likely to leave the labor force, then these
unemployed workers are not contributing much to labor market slack. They
are unlikely to be hired under any conditions. </blockquote>
That is, the unemployment (and presumably the depressed particpation rate, too) is "structural" in nature, and not amenable to any improvement in aggregate demand that might be generated with expansionary monetary policy.<br />
<br />
An alternative view is that the long-term unemployed, and some of those who have exited the labor force, could be brought back into employment by particularly strong aggregate demand - what used to be called a "high pressure" economy. This would be possible if the forces of hysteresis work in both directions, as <a href="http://www.brookings.edu/~/media/projects/bpea/fall-1999/1999b_bpea_ball.pdf">this 1999 paper by Laurence Ball suggested</a>.<br />
<br />
That seemed to me to be what <a href="http://www.federalreserve.gov/newsevents/speech/yellen20150924a.htm">Janet Yellen was hinting at in her September speech</a> at UMass-Amherst when she said:<br />
<blockquote class="tr_bq">
Reducing slack along these other dimensions may involve a temporary
decline in the unemployment rate somewhat below the level that is
estimated to be consistent, in the longer run, with inflation
stabilizing at 2 percent. For example, attracting discouraged workers
back into the labor force may require a period of especially plentiful
employment opportunities and strong hiring. Similarly, firms may be
unwilling to restructure their operations to use more full-time workers
until they encounter greater difficulty filling part-time positions.
Beyond these considerations, a modest decline in the unemployment rate
below its long-run level for a time would, by increasing resource
utilization, also have the benefit of speeding the return to 2 percent
inflation. Finally, albeit more speculatively, such an environment might
help reverse some of the significant supply-side damage that appears to
have occurred in recent years, thereby improving Americans' standard of
living.</blockquote>
It seems to be that doing this would likely entail the Fed overshooting its 2% inflation target. I have my doubts about their willingness to do this (and Yellen certainly did not suggest it). And for it to work, inflation expectations would need to remain anchored (i.e., if any additional inflation just ratched up expectations, it would not bring unemployment down).Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com2tag:blogger.com,1999:blog-7439628176985419293.post-48358473811566423442015-09-20T08:50:00.000-04:002015-09-20T08:50:56.921-04:00One of These Things is Not Like the OthersAmong the steps the Fed has taken to increase transparency in recent years is the release of projections by the board members and regional bank presidents. This includes the "dot plot" indicating each participant's belief about what the appropriate federal funds rate target will be at the end of this year and the next three years.<br />
<br />
One of the dots from the <a href="http://www.federalreserve.gov/newsevents/press/monetary/20150917b.htm">latest release</a> (I've indicated with a red arrow) shows a preference for a <i>negative</i> fed funds rate this year and next, and a much lower rate than everyone else expects at the end of 2017.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXAqP9yJ4RuJsX57g1HzADQ_AozQXYqAwiAmrbmn7N-3Rem2s0gHvMDYlgXammMZLg-LkzSQr-WzKI0QI-QXe0OL3eebduOoE-xcH0E2GLcGbGwF222a__qHOXbN_wpu3iH7IKzMd7gW5l/s1600/fomcdots.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="341" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXAqP9yJ4RuJsX57g1HzADQ_AozQXYqAwiAmrbmn7N-3Rem2s0gHvMDYlgXammMZLg-LkzSQr-WzKI0QI-QXe0OL3eebduOoE-xcH0E2GLcGbGwF222a__qHOXbN_wpu3iH7IKzMd7gW5l/s400/fomcdots.jpg" width="400" /></a></div>
People on twitter seem to think its most likely Minneapolis Fed President Kocherlakota's dot. It called to mind this, from the deep recesses of childhood memory:<br />
<iframe allowfullscreen="" frameborder="0" height="315" src="https://www.youtube.com/embed/xkLOoN79dBs" width="420"></iframe>
(That's from Sesame Street). <br />
<br />
Of more serious interest, the projections also included a reduction in the median "longer run" federal funds target, to 3.5%, from 3.8% at the last release in June, and also a lower estimate of the "longer run" unemployment rate, which might be taken as a proxy for a NAIRU estimate (<a href="http://krugman.blogs.nytimes.com/2015/09/18/the-receding-nairu/">see Krugman</a>).Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com2tag:blogger.com,1999:blog-7439628176985419293.post-71194720395103681392015-09-11T19:26:00.001-04:002015-09-11T19:26:29.882-04:00Rodrik on Economic ModelsThere is an <a href="https://www.project-syndicate.org/commentary/economists-versus-economics-by-dani-rodrik-2015-09">an excellent piece by Dani Rodrik on economic methodology</a> at Project Syndicate:<br />
<div class="copy-paste-block">
<blockquote class="tr_bq">
<div class="copy-paste-block">
Economics
is not the kind of science in which there could ever be one true model
that works best in all contexts. The point is not “to reach a consensus
about which model is right,” as Romer puts it, but to figure out which
model applies best in a given setting. And doing that will always remain
a craft, not a science, especially when the choice has to be made in
real time. <br />
<br />
The
social world differs from the physical world because it is man-made and
hence almost infinitely malleable. So, unlike the natural sciences,
economics advances scientifically not by replacing old models with
better ones, but by expanding its library of models, with each shedding
light on a different social contingency.</div>
</blockquote>
</div>
<div data-line-id="4d8bc86a768444d28356cab65b088e6d">
Or, as <a href="http://twentycentparadigms.blogspot.com/2010/08/keynes-on-science-and-art-of-economics.html">Keynes put it</a>, "Economics is the science of thinking in terms of models joined to the
art of choosing models which are relevant to the contemporary world." </div>
<div data-line-id="4d8bc86a768444d28356cab65b088e6d">
<br /></div>
<div data-line-id="4d8bc86a768444d28356cab65b088e6d">
Rodrik goes on to discuss Borges' story "<a href="http://genius.com/Jorge-luis-borges-on-exactitude-in-science-annotated">On Exactitude in Science</a>" - a parable about cartographers who make a map on the same scale as the world it was meant to represent. This story, which was our reading for <a href="https://sites.google.com/site/wdcraighead/Econ%20110%20Syllabus%20Outline%20Spr%2015.pdf?attredirects=0">Econ 110</a> yesterday, illustrates the point that "more realistic" isn't necessarily better.</div>
Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-73657623175567018552015-09-10T08:58:00.001-04:002015-09-10T08:58:41.599-04:00A Note on "Credibility"Fed watchers are speculating that the FOMC meeting later this month might be the occasion to raise the federal funds rate target off the "zero lower bound," where it has been since December 2008. In a column arguing against such a move, <a href="http://www.washingtonpost.com/news/wonkblog/wp/2015/09/09/larry-summers-why-the-fed-must-stand-still-on-rates/">Larry Summers writes</a>:<br />
<blockquote class="tr_bq">
From the Depression to the Vietnam War to the Iraq war to the euro
crisis, we surely should learn that policymakers who elevate credibility
over responding to clear realities make grave errors. The best way the
Fed can maintain and enhance its credibility is to support a fully
employed American economy achieving its inflation target with stable
financial conditions. The greatest damage it could do to its credibility
would be to embrace central-banking shibboleth disconnected from
current economic reality.</blockquote>
At the Fiscal Times, <a href="http://www.thefiscaltimes.com/Columns/2015/09/08/Why-Fed-Must-Banish-1970-s-Inflation-Devil-Raising-Rates">Mark Thoma writes</a>:<br />
<blockquote class="tr_bq">
The inflation problems of the 1970s, the loss of Fed credibility that
came with it, and the need to impose the Volcker recession in the early
1980s to bring inflation down to tolerable levels made an indelible
impression on policymakers who lived through that time period. The Fed’s
trigger-happy response to any suggestion of an inflation problem is
directly related to the desire to never let such an inflation outburst
happen again.<br />
<br />
But it has been more than four decades since the beginning of the
inflation problems of the 1970s, and the economic environment in which
monetary policy operates has changed considerably since that time. Those
changes support patience, particularly in response to increases in
wages, wages that have been stagnant since the 1970s even as labor
productivity has been increasing.</blockquote>
The "credibility" argument in monetary policy is based on the idea that the central bank will be tempted to use inflation to "overheat" the economy and bring unemployment down below its "natural" (or equilibrium) levels for political reasons - e.g., to help the incumbent party in an election year. Any gains would be, at best, short-lived, as people would incorporate a higher level of inflation into their expectations and set wages and prices accordingly. Based on this logic - which seems helpful for interpreting how we got into the "stagflation" of the 1970s - economists look for policies and institutional structures to correct this perceived inflationary bias.<br />
<br />
In the past several years, this logic seems turned on its head. If anything, the biases of our monetary policymakers appear to be in the other direction. Inflation continues to be subdued, as this plot of one of the Fed's preferred measures, the "core" deflator for personal consumption expenditures, shows:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4A0OvH-LrFS75GeoG-da4hyMNZ04z7OMnf6b35NcQS6S0jOPECOkytmSJytzZaOH8k8y24qAtYf_UBY2rlOyFUneJTeuQMXKHfCpJVbmjUHs-zjXqIcCifpqMMZcv_WbeD1M1RoKlfFlb/s1600/fredgraph.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4A0OvH-LrFS75GeoG-da4hyMNZ04z7OMnf6b35NcQS6S0jOPECOkytmSJytzZaOH8k8y24qAtYf_UBY2rlOyFUneJTeuQMXKHfCpJVbmjUHs-zjXqIcCifpqMMZcv_WbeD1M1RoKlfFlb/s400/fredgraph.jpg" width="400" /></a></div>
The red line is drawn at 2%. <a href="http://macromarketmusings.blogspot.com/2015/09/revealed-preferences-fed-inflation.html"> </a><a href="https://www.clevelandfed.org/en/Our%20Research/Indicators%20and%20Data/Estimates%20of%20Inflation%20Expectations.aspx">Measures of expected inflation</a> are also below 2%. <a href="http://macromarketmusings.blogspot.com/2015/09/revealed-preferences-fed-inflation.html">David Beckworth recently argued</a> that the Fed is acting as if 2% is a ceiling, not a target - he suggests the Fed's behavior is consistent with it aiming to keep inflation between 1% and 2%. <br />
<br />
But the <a href="http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm">the Fed declared in 2012</a>: "The Committee judges that inflation at the rate of 2 percent, as
measured by the annual change in the price index for personal
consumption expenditures, is most consistent over the longer run with
the Federal Reserve's statutory mandate." If the goal is to "anchor" expectations at 2%, the Fed is at risk of failing, but the greater threat to its credibility seems to be too little inflation, not too much.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-89032794487128641292015-09-05T15:44:00.002-04:002015-09-05T15:44:32.112-04:00China and the Solow ModelLast month, just before China let its currency deprecate and its stock market crashed, the San Francisco Fed published a nice Economic Letter by Zheng Liu, "<a href="http://www.frbsf.org/economic-research/publications/economic-letter/2015/august/china-economic-growth-miracle-slowdown/">Is China's Growth Miracle Over?</a>"<br />
<br />
China's rapid, but decelerating, growth is broadly consistent with the implications of the classic Solow growth model we teach our intermediate macroeconomics students. This model predicts that low-income countries should grow quickly, but growth will slow down as they approach the leading countries, whose per-capita growth is constrained by the rate of technological progress. That is, there should be "convergence" in per capita GDP. <br />
<br />
As this chart from the letter shows, China is following a similar path to Korea and Japan.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOtSkJb1trPvRf1AkvdXoTWcGn6twy8I9ymOKN-5xMShNZPT9CWi2ZTX91SgPvROh3d4Z8PCa_xbiAw9VsUUNELCd0XZ-ljN5hJgY1o3YbuMDEapGmJBFiW4LpUOOlKbiBH-WSfdFe3An3/s1600/china.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOtSkJb1trPvRf1AkvdXoTWcGn6twy8I9ymOKN-5xMShNZPT9CWi2ZTX91SgPvROh3d4Z8PCa_xbiAw9VsUUNELCd0XZ-ljN5hJgY1o3YbuMDEapGmJBFiW4LpUOOlKbiBH-WSfdFe3An3/s400/china.jpg" width="400" /></a></div>
The basic intuition from the model comes from the idea of diminishing marginal product of capital - i.e., where capital (machinery and equipment) is scarce, the increase in output from adding an additional unit is greater than where it is already abundant. This diagram of output per capita (y) as a function of capital per capita (k) illustrates,<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjD8Xg1kpD8A227oYgDeimd5cQYPiv2Zh0eyhaE0qfEfTbRqvYZGURPhhuY86NLmzSVjF3vvkjyjslIznla7uEZz-6M0nu7rqk4ec4L-ByGoZ-1guAO76tShUdgF7eFVwONODfzaMl98t7/s1600/mpk.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="162" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjD8Xg1kpD8A227oYgDeimd5cQYPiv2Zh0eyhaE0qfEfTbRqvYZGURPhhuY86NLmzSVjF3vvkjyjslIznla7uEZz-6M0nu7rqk4ec4L-ByGoZ-1guAO76tShUdgF7eFVwONODfzaMl98t7/s400/mpk.jpg" width="400" /></a></div>
where the slope is the marginal product of capital (MPk).<br />
<br />
The idea can be extended to include "human capital" (i.e., knowledge and skills), as Mankiw, Romer and Weil did in <a href="http://www.jstor.org/stable/2118477">a 1992 paper</a>.<br />
<br />
While the Solow model gets the broad contours of the growth experiences of Korea, Japan and (it seems so far) China correct (and does pretty well for the US as well), it does miss a couple of big things:<br />
<br />
(1) A diminishing marginal product of capital implies that the financial rewards to investing in a low income country should be vastly higher than in high-income countries. In a world where people can invest across borders, this implies a huge incentives for financial flows from high-income to low-income countries, but we do not observe such large net flows. This was the puzzle Robert Lucas noted in <a href="http://www.jstor.org/stable/2006549">a 1990 paper</a>.<br />
<br />
(2) While the experiences of some low-income countries is consistent with the convergence hypothesis; in many cases, low-income countries have fallen further behind (or, as Lant Pritchett wrote, "<a href="https://www.aeaweb.org/articles.php?doi=10.1257/jep.11.3.3">Divergence, Big Time.</a>"). From the standpoint of the Solow model, growth "miracles" like those of Korea are to be expected, and the real puzzle is the fact the failure of so many countries to converge.<br />
<br />
As <a href="http://www.jstor.org/stable/2122171">Moses Abramovitz pointed out in 1986</a>, it is usually a subset of the low-income countries that are growing fastest. This would suggest there are forces for convergence, but something is preventing them from applying everywhere. Current thinking is that the answer lies in "institutions" - the set of legal rights, culture, and governance which shape the economic environment and incentives for people to take actions within it, including to accumulate capital.<br />
<br />
This is where assuming that China will continue to follow in the convergence footsteps of Korea and Japan may be questionable. While China's institutions have gotten it this far, there are reasons to doubt whether they are appropriate for achieving levels of GDP per capita comparable to Korea, Japan and Europe, as this <a href="http://www.huffingtonpost.com/brad-delong/china-market-crash-5-years_b_8045742.html">column by Brad DeLong</a> and <a href="http://www.nytimes.com/2015/08/26/business/economy/chinese-economy-faces-risks-from-political-instability.html?rref=collection%2Fcolumn%2Feconomic-scene&action=click&contentCollection=business&region=stream&module=stream_unit&contentPlacement=2&pgtype=collection">this by Eduardo Porter</a> discuss. That said, the institutions in the US during its late 19th century industrialization were hardly what an economist would recommend (in particular, corruption was rampant), and yet it somehow managed to take over leadership in per capita GDP from Britain.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com6tag:blogger.com,1999:blog-7439628176985419293.post-49158000039030754132015-08-28T12:25:00.000-04:002015-08-28T12:25:21.526-04:00Economics is More Than You Think<i>and it helps you learn how to think.... </i><br />
<br />
One of the challenges in teaching economics is that many come to it with incorrect expectations - people seem to view it as akin to accounting or finance. In a liberal arts setting, the students (and their parents) may believe it is the closest thing they can get to a business major (<a href="http://sandcat.middlebury.edu/econ/repec/mdl/ancoec/0810.pdf">this paper provides evidence on this point</a>).<br />
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This short video from the American Economic Association - "<a href="https://vimeo.com/135871291">A Career in Economics - It's Much More Than You Think</a>" - does a nice job of correcting some of these misconceptions.<br />
<br />
However, I think the video misses one of the main reasons for studying economics: the habits of mind - "critical thinking skills" - it helps students develop (I wrote more about this <a href="http://twentycentparadigms.blogspot.com/2007/08/principles-of-principles.html">here</a>). Most of our students aren't going on to careers in economics, and they will forget many of the specifics, but being able to think coherently about tradeoffs and the linkages between assumptions and conclusions is a lifelong benefit.<br />
<br />
So, yes, people who are interested in business should study economics, as should people who are interested in a career in economics (my own advice about that is <a href="https://sites.google.com/site/wdcraighead/grad-school-advice">here</a>), but so should everyone else!Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-80521821329261858272015-08-19T01:11:00.000-04:002015-08-19T01:17:23.906-04:00Opportunistic FlexibilityLast week, China moved to allow more flexibility in its exchange rate. In this case, that meant a downward movement - headlines about a "devaluation" were rather overstated, though, as the depreciation from Monday to Thursday was about 3% (followed by a slight rise on Friday). Last week's change is at the end of the graph:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdySyr-kbthwx-FNO5JZSgc30wNV1ImCnQWqaZz3hSMn2iqnU034LgYd5s-oL-6Z2yX-6y518LNz4gaTYs0WLj9x6Zalq6UCgGZrsZRN0gB4otykAiM-3zXDC9ePGAi6ZYqHdbOez-8VLN/s1600/fredgraph.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdySyr-kbthwx-FNO5JZSgc30wNV1ImCnQWqaZz3hSMn2iqnU034LgYd5s-oL-6Z2yX-6y518LNz4gaTYs0WLj9x6Zalq6UCgGZrsZRN0gB4otykAiM-3zXDC9ePGAi6ZYqHdbOez-8VLN/s400/fredgraph.jpg" width="400" /></a></div>
Note, the graph is the yuan price of a dollar, so a downward movement is a yuan appreciation.<br />
<br />
China has been criticized over the years for keeping its exchange rate undervalued to support its exports. The graph shows that it has allowed the yuan to rise quite a bit since 2005, though it has done so in a controlled manner and took a pause for about two years starting in mid-2008. Its appreciation has helped China make progress on one aspect of "rebalancing" - reducing its dependence on exports. China's current account surplus is considerably smaller relative to GDP than it was in 2006-08:<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhd5va9i4mJ-6IJWq6WODrU2tiI5aG75wTRlTqhlxlra6C_XlqrMRAawrfeKGZvgjwpIj20snw3WKkiaviFShEYkfUxUixkt3mAVdLVR3RNJp9n5NtGIknEelZJdfvUshZFQdqLZ98LcXuS/s1600/china+CA.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhd5va9i4mJ-6IJWq6WODrU2tiI5aG75wTRlTqhlxlra6C_XlqrMRAawrfeKGZvgjwpIj20snw3WKkiaviFShEYkfUxUixkt3mAVdLVR3RNJp9n5NtGIknEelZJdfvUshZFQdqLZ98LcXuS/s400/china+CA.jpg" width="400" /></a></div>
So, does this move represent a return to China's old ways of undervaluing its currency to gain a competitive edge for its exports?<br />
<br />
Well, yes and no...<br />
<br />
As it has followed the dollar, and the dollar has risen, the yuan has appreciated in real terms. This chart shows a trade-weighted average of the dollar:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjk8O4LfEjg_kQwOiQOF_04fH9o9opQJvnkhTIeGB0rZL_tMLQewjm6Sl4IJ8HlJ7SoC3oubaSA58gpsCBfK5seTk0HxCYGfjA4pMa-CzbVHSrNWVmvEi1txNkMVzJNKVZzk8Uv8eGtENL4/s1600/dollar.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjk8O4LfEjg_kQwOiQOF_04fH9o9opQJvnkhTIeGB0rZL_tMLQewjm6Sl4IJ8HlJ7SoC3oubaSA58gpsCBfK5seTk0HxCYGfjA4pMa-CzbVHSrNWVmvEi1txNkMVzJNKVZzk8Uv8eGtENL4/s400/dollar.jpg" width="400" /></a></div>
During the last year the dollar has appreciated significantly and the yuan has been along for the ride. Currency appreciation - which makes Chinese goods relatively more expensive on world markets - combined with a slowing economy led to political pressure for a change of course. The <a href="http://www.nytimes.com/2015/08/18/business/international/chinas-devaluation-of-its-currency-was-a-call-to-action.html">Times' Keith Bradsher writes</a>:<br />
<blockquote class="tr_bq">
<div class="story-body-text story-content" data-para-count="160" data-total-count="470" itemprop="articleBody">
In
a little-noted advisory to government agencies, the cabinet said it was
essential to fix the export problem, and the currency had to be part of
the solution.</div>
<div class="story-body-text story-content" data-para-count="241" data-total-count="711" itemprop="articleBody">
<br /></div>
<div class="story-body-text story-content" data-para-count="241" data-total-count="711" itemprop="articleBody">
With
the government keeping a tight grip on the value of the renminbi,
Chinese goods were more expensive than rivals’ products overseas. The
currencies of other emerging markets had fallen, and China’s exporters
could not easily compete.</div>
<div class="story-body-text story-content" data-para-count="89" data-total-count="800" itemprop="articleBody">
<br /></div>
<div class="story-body-text story-content" data-para-count="89" data-total-count="800" itemprop="articleBody">
Soon after, the Communist Party leaders issued a statement also urging action on exports.</div>
</blockquote>
<div class="story-body-text story-content" data-para-count="89" data-total-count="800" itemprop="articleBody">
However, China has also been moving in the direction of greater financial openness; this entails allowing freer exchange rate movements (as I discussed in <a href="http://twentycentparadigms.blogspot.com/2013/05/china-to-switch-sides-of-trilemma.html">this previous post</a>), particularly if it wants the yuan to become an international reserve currency (a status <a href="http://krugman.blogs.nytimes.com/2015/08/12/international-money-mania/">Krugman rightly notes is highly overrated</a>). At Project Syndicate, <a href="http://www.project-syndicate.org/commentary/china-domestic-consumption-by-yu-yongding-2015-08">Yu Yongding writes</a>:</div>
<blockquote class="tr_bq">
<div class="copy-paste-block">
From now on, China’s government declared,
the renminbi’s central parity rate will align more closely with the
previous day’s closing spot rates. This suggests that the devaluation
was aimed primarily at giving the markets a greater role in determining
the renminbi exchange rate, with the goal of enabling deeper currency
reform.
</div>
</blockquote>
<div class="copy-paste-block">
So, yes, China has other reasons for moving to a more flexible exchange rate, but it is convenient for them to take a step in that direction at a moment when doing so means a fall in the yuan that will boost demand for Chinese goods.</div>
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</div>
<div class="copy-paste-block">
See also: <a href="http://www.telegraph.co.uk/finance/economics/11799504/China-cannot-risk-the-global-chaos-of-currency-devaluation.html">Ambrose-Evans Pritchard</a>, <a href="http://blogs.ft.com/gavyndavies/2015/08/12/has-china-just-pressed-the-escape-button/">Gavyn Davies</a>, <a href="http://www.brookings.edu/research/opinions/2015/08/13-devaluing-the-renminbi-yuan-klein">Michael Klein</a>, <a href="http://macromarketmusings.blogspot.com/2015/08/impossible-trinity-deflationary-shocks.html">David Beckworth</a>, <a href="http://blog.mpettis.com/2015/08/do-markets-determine-the-value-of-the-rmb/">Michael Pettis</a>.</div>
<div class="copy-paste-block">
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Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-73556528159796428152015-08-18T00:08:00.003-04:002015-08-18T00:08:49.431-04:00Stories from the Macro Wars<a href="http://www.newyorker.com/magazine/2015/08/03/the-greek-warrior">Ian Parker's recent New Yorker profile of Yanis Varoufakis</a> included this nugget: "He has written of his hope, as a professor, to present economics as 'a
contested terrain on which armies of ideas clash mercilessly.'"<br />
<br />
That may be an apt description of macroeconomics in the 1970s and 1980s. On his website, <a href="http://paulromer.net/what-went-wrong-in-macro-historical-details/">Paul Romer has offered an interesting take</a> on the methodenstreit between the dynamic general equilibrium approach (so-called "freshwater" macro, championed by Robert Lucas) and Keynesian macro-econometric models (the "saltwater" camp). Romer is particularly critical of Robert Solow, arguing that his dismissive attitude towards Lucas et al., contributed into a counterproductive hardening of differences. He writes:<br />
<blockquote class="tr_bq">
Solow also seemed to be motivated to attack harshly because he
was concerned that the type of model Lucas was developing might
undermine political support for active countercyclical policy. To his
credit, there was a legitimate basis for this concern. The new Chicago
school of macro eventually did oppose an active response to the
financial crisis and its aftermath. But the type of response that Solow
exemplified may actually have contributed to the emergence of this new
Chicago school. In retrospect, if the goal was to maintain support for
active macro policy, the better course would have been to take seriously
what the rebel group that was forming around Lucas was saying. This
might have kept the rebels from cutting off contact with all outsiders,
even those who were taking seriously the issues they were raising.</blockquote>
<a href="http://equitablegrowth.org/2015/08/09/agree-part-dissent-part-paul-romers-narrative-intellectual-collapse-chicago-school-macro/">Brad DeLong</a> and <a href="http://krugman.blogs.nytimes.com/2015/08/10/trash-talk-and-the-macroeconomic-divide/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body">Paul Krugman</a> responded in defense of Solow. DeLong writes:<br />
<blockquote class="tr_bq">
And, at this point, Romer ought to say that Solow’s and Hahn’s
criticisms were (a) no more biting in their rhetoric than the criticisms
that Stigler, Friedman, and company had been inflicting on their
victims at Chicago for a generation, and (b) correct and accurate.</blockquote>
<a href="http://paulromer.net/solows-choice/">Romer has more interesting detail in his response</a>, including this summary of the main points:<br />
<blockquote class="tr_bq">
In the summer of 1978, Lucas and Sargent were making three claims:<br />
<div style="padding-left: 30px;">
(a) Existing multi-equation macro
simulation models were not identified. That is, these models summarized
correlations in the data but did not yield reliable statements of the
form “if the government does X, this will cause Y to happen.”</div>
<div style="padding-left: 30px;">
(b) It was time to use SAGE models to
address such fundamental questions about economic fluctuations as why
changes in the supply of money influence economic activity; and</div>
<div style="padding-left: 30px;">
(c) SAGE models will imply that an active monetary policy cannot stabilize economic fluctuations.</div>
Solow thought that Lucas and Sargent were wrong about the policy
ineffectiveness claim (c). DeLong, Krugman, and I all agree. In the 2013
introduction to his <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674066878">collected papers</a>,
Lucas uses some asides about the Great Depression and the Great
Recession to admit that now even he agrees. Claim (c) is what DeLong and
Krugman have in mind when they say that Solow was right and Lucas was
wrong. <br />
Yet all macroeconomists now agree that Lucas and Sargent were correct
about the fatal problems with the large simulation models. Much of
Solow’s response amounted to an implausible denial that there was
anything wrong with them. So on this point, the roles are reversed.
Lucas and Sargent were right and Solow was wrong.</blockquote>
[Romer uses "SAGE" to refer to general equilibrium models]. See also: <a href="http://krugman.blogs.nytimes.com/2015/08/02/freshwaters-wrong-turn-wonkish/">this from Krugman</a>, and <a href="http://equitablegrowth.org/2015/08/15/always-thanked-robert-lucas-giving-us-monopoly-valuable-macroeconomics/">this from DeLong</a>. <a href="http://uneasymoney.com/2015/08/13/romer-v-lucas/">David Glasner has a thoughtful post</a> putting things in a broader context.<br />
<br />
In his post, Romer cites several papers, including Lucas and Sargent's "After Keynesian Macroeconomics," from the <a href="http://www.bostonfed.org/economic/conf/conf19/">1978 Boston Fed conference</a>. Perhaps it should be known as "the throwdown in Edgartown."<br />
<br />
Fascinating stuff... but fortunately for contemporary macroeconomists - particularly those of us with conflict-averse midwestern temperaments - things aren't nearly so rancorous now. There certainly are differences of inclination and opinion, and economists can be blunt in expressing their differences, but the "saltwater" vs. "freshwater" cleavage is largely a thing of the past, as <a href="http://newmonetarism.blogspot.com/2011/03/disagreement.html">this Steven Williamson post explains</a>. Since the wars of the 1970s and 80s, there has been some convergence: macroeconomists have developed a class of models - sometimes called "New Keynesian" - which respond to Lucas' methodological critique but also allow for a stabilizing role for macroeconomic policy. That's not to suggest we've figured it all out, of course; this recent <a href="http://www.thefiscaltimes.com/Columns/2015/08/11/Macroeconomics-Roads-Not-Yet-Taken">Mark Thoma column highlights some of the weak points</a> of contemporary theory.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com2tag:blogger.com,1999:blog-7439628176985419293.post-25898737690477730542015-08-06T21:01:00.001-04:002015-08-06T21:19:22.393-04:00NPR Visits Keynes' (Sister's) GrandchildrenOne of the pleasures of teaching is the opportunity to re-read the articles I assign to my students; one particular favorite that I look forward to each semester is Keynes' essay "<a href="http://www.econ.yale.edu/smith/econ116a/keynes1.pdf">Economic Possibilities for Our Grandchildren</a>." NPR's Planet Money recently did an episode about it, focusing on Keynes' famously incorrect (thus far) prediction of a 15-hour workweek. Although Keynes had no progeny, they did check in with his sister's grandchildren, as well as Harvard economist Richard Freeman - all of whom seem to be hard workers.
<iframe frameborder="0" height="200" scrolling="no" src="http://www.npr.org/player/embed/426017148/426029196" width="100%"></iframe>
I discussed some ideas about why we're not enjoying so much leisure in <a href="http://twentycentparadigms.blogspot.com/2014/06/keynes-over-worked-grandchildren.html">a post last year</a>. Tim Harford also has <a href="http://timharford.com/2015/08/the-rewards-for-working-hard-are-too-big-for-keyness-vision/">some thoughts on his blog</a>.<br />
<br />
The prediction about leisure was part of Keynes' more general forecast that economic growth would solve the "economic problem" of scarcity (and his guess about the rate of growth was pretty accurate), and speculation about the social change that would result. In a similar spirit, in his<a href="http://www.bloombergview.com/articles/2015-08-03/star-trek-economy-and-life-after-the-dismal-science"> Bloomberg column,</a> Noah Smith suggested that a post-scarcity world might be like Star Trek: The Next Generation. He concludes:<br />
<blockquote class="tr_bq">
In other words, the rise of new technology means that all the economic
questions will change. Instead of a world defined by scarcity, we will
live in a world defined by self-expression. We will be able to decide
the kind of people that we want to be, and the kind of lives we want to
live, instead of having the world decide for us. The Star Trek utopia
will free us from the fetters of the dismal science. </blockquote>
Or, as Keynes put it in 1930:<br />
<blockquote class="tr_bq">
Thus for the first time since his creation man will be faced with his real, his permanent problem- how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. </blockquote>
Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-53177322658821851292015-07-30T18:03:00.000-04:002015-07-30T18:03:42.033-04:00Pushing on a StringOne for the footnotes: <a href="http://conversableeconomist.blogspot.com/2015/07/pushing-on-string-origin-story.html?utm_source=twitterfeed&utm_medium=twitter">Timothy Taylor has tracked down the origin</a> of the "pushing on a string" metaphor for expansionary monetary policy in a depressed economy. It looks like we owe it to Maryland congressman <a href="http://bioguide.congress.gov/scripts/biodisplay.pl?index=G000265">Thomas Alan Goldsborough</a>, who used it in a 1935 hearing with Fed Chairman Marriner Eccles.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-33903813562188998082015-07-30T17:45:00.001-04:002015-07-30T17:45:12.748-04:002Q GDPThe BEA released the <a href="http://www.bea.gov/newsreleases/national/gdp/2015/pdf/gdp2q15_adv.pdf">advance estimate of second quarter GDP</a> growth today: the good news is that US output grew at a 2.3% annual rate in the period - a healthy, though unspectacular, pace. The growth was largely driven by consumption (about 70% of GDP), which grew at a 2.9% rate. Also, the BEA revised up its estimate of growth in first quarter to an 0.6% rate, from -0.2% in the previous release.<br />
<br />
The more disappointing news came in the "annual revision" of estimates for 2012-2014 which were included in today's release. The new estimates indicate that the agonizingly slow recovery has been a little more sluggish than we previously thought - GDP growth was revised downwards 0.1pt for 2012 and 0.7pt for 2013.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-I2WotAY1pp372R6rXbT7xIYZ2tNFMqyoUncvb6DrFtRZQsG9oA1i7YfAXQeuryobXsX6YQB_W_HB-MogGscVw0qzzmM57mfGCe7fnau4TgTuWqet2F-9ffzsW1fG1mpgWCkuFWyHPziB/s1600/alfredgraph.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-I2WotAY1pp372R6rXbT7xIYZ2tNFMqyoUncvb6DrFtRZQsG9oA1i7YfAXQeuryobXsX6YQB_W_HB-MogGscVw0qzzmM57mfGCe7fnau4TgTuWqet2F-9ffzsW1fG1mpgWCkuFWyHPziB/s400/alfredgraph.jpg" width="400" /></a></div>
The red line shows the revised figures, the blue line is the previous estimate. The lower estimates of output growth also imply that labor productivity - output per unit of labor - growth was a little slower than previously thought. Since labor productivity is the main determinant of changes in living standards over time, further evidence that it has shifted to a lower trend is a discouraging indication about long-run prospects.<br />
<br />
This release also had an interesting wrinkle: the BEA is also now releasing the average of the standard expenditure-based GDP figure and the income-based measure (which it calls Gross Domestic Income). In principle, they should be the same, but, in practice, there is usually a "statistical discrepancy." This <a href="https://www.whitehouse.gov/sites/default/files/docs/gdo_issue_brief_final.pdf">issue brief from the Council of Economic Advisors</a> explains why the average - which its calling "Gross Domestic Output" (we'll see if that sticks...) might be a better indicator.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-10959444287848087842015-07-25T00:30:00.000-04:002015-07-25T00:30:02.545-04:00Professor Keynes is OptimisticAn <a href="https://www.youtube.com/channel/UCHq777_waKMJw6SZdABmyaA">archive of British Movietone newsreels</a> has been added to YouTube, including one of John Maynard Keynes commenting on Britain's departure from the gold standard in 1931:
<iframe allowfullscreen="" frameborder="0" height="280" src="https://www.youtube.com/embed/0PYSFqCSsGU" width="420"></iframe>
Another newsreel discusses leaving the gold standard and includes footage of Sir Josiah Stamp explaining the decision:
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This <a href="http://www.telegraph.co.uk/finance/commodities/11330611/How-the-Bank-of-England-abandoned-the-gold-standard.html">Telegraph article</a> describes some of the correspondence between the bank and the government about the crisis. Britain's exit - after painfully resuming the gold standard at its prewar parity in 1925 - was one episode in a series of sterling crises in the 20th century. Last year, I posted some <a href="http://twentycentparadigms.blogspot.com/2014/04/sterling-crisis.html">newsreels from the 1949 and 1967 devaluations</a>. <br />
<br />
Note: An <a href="http://twentycentparadigms.blogspot.com/2011/10/keynes-on-youtube.html">earlier post from 2011</a> had a fragment of the same Keynes newsreel, but now we are fortunate to have it in full.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-3871234666704957192015-07-14T12:33:00.001-04:002015-07-15T00:25:48.916-04:00Greek Tragedy, European FarceIt looks as though <a href="http://www.nytimes.com/2015/07/14/world/europe/greece-debt-plan.html?action=click&contentCollection=Europe&module=RelatedCoverage&region=Marginalia&pgtype=article">Greece is staying in the euro, after all</a> (for now at least...). The terms of the deal - pending approval by the Greek parliament - are not very favorable to Greece. Essentially it means more of the same - additional financing from the EU in exchange for more austerity, "structural reforms" (<a href="http://www.vox.com/2015/7/12/8939937/greece-sunday-shopping-germany">in some cases absurdly detailed</a>) and a EU supervised privatization of state-owned assets. There is a vague promise to consider debt restructuring, but nothing concrete.<br />
<br />
The reports from the negotiations over the weekend reinforced the impression that Germany, along with some of the other smaller countries, really wanted to push Greece out, but the French and Italians worked to prevent this outcome.<br />
<br />
From the viewpoint of Germany, the issue is making sure that euro membership entails following associated rules and obligations: a more forgiving treatment of Greece would create a "moral hazard" problem, inviting more deviations in the future. However, the rules they are enforcing do not make economic sense: they force procyclical fiscal policies and fail to confront an unsustainable debt burden. (Some sympathy for the Germans, though: <a href="http://www.voxeu.org/article/birth-european-macroeconomics">as this VoxEU piece by Kang and Mody illustrates</a>, they were reluctant about the euro from the beginning).<br />
<br />
The response to the deal has been highly critical: see <a href="http://www.project-syndicate.org/commentary/greece-debt-agreement-risks-by-barry-eichengreen-2015-07">Barry Eichengreen</a>, <a href="http://www.ft.com/intl/cms/s/2/04312dc0-2729-11e5-bd83-71cb60e8f08c.html#axzz3fq7Ppr3a">Martin Sandbu</a>, <a href="http://www.ft.com/intl/cms/s/0/e38a452e-26f2-11e5-bd83-71cb60e8f08c.html#axzz3fnAEiHj5">Wolfgang Munchau</a>, <a href="http://www.cer.org.uk/insights/greek-bailout-deal-resolves-nothing">Christian Odendahl and John Springford</a>, <a href="http://krugman.blogs.nytimes.com/2015/07/12/killing-the-european-project/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body">Paul Krugman</a>, <a href="http://www.telegraph.co.uk/finance/economics/11737388/Greek-deal-poisons-Europe-as-backlash-mounts-against-neo-colonial-servitude.html">Ambrose Evans-Pritchard</a>, <a href="http://www.newyorker.com/news/john-cassidy/a-humiliating-deal-for-greece">John Cassidy</a>, <a href="http://www.bloombergview.com/articles/2015-07-13/europe-s-insane-deal-with-greece">Eric Beinhocker</a>, <a href="http://www.nytimes.com/2015/07/14/upshot/the-greek-deal-is-a-disaster-for-greece-and-maybe-for-europe.html?ref=liveblog&abt=0002&abg=1">Neil Irwin.</a> This <a href="http://www.newstatesman.com/world-affairs/2015/07/exclusive-yanis-varoufakis-opens-about-his-five-month-battle-save-greece">interview with former finance minister Varoufakis</a> is also interesting. <a href="http://mainlymacro.blogspot.com/2015/07/greece-and-trust.html?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+MainlyMacro+%28mainly+macro%29">Simon Wren-Lewis has a nice post on "trust,</a>" a word which has been thrown around alot lately.<br />
<br />
The <a href="http://www.ft.com/intl/cms/s/0/30e6bc60-2957-11e5-acfb-cbd2e1c81cca.html?ftcamp=crm/email/2015714/nbe/Comment/product#axzz3fqTcU668">FT's Gideon Rachman has a somewhat different take</a>, emphasizing that Germany backed off its evident desire to force a "Grexit".<br />
<br />
One condition of the deal was continued IMF involvement. While Greece objected to this, it may ultimately prove to be in their favor - the IMF has the capacity to act as a voice of sanity, and they have said that Greece's debt is unsustainable (much of the criticism of the IMF is that they haven't pushed strongly enough for a debt writedown, as they ordinarily would). <a href="http://blog-imfdirect.imf.org/2015/07/09/greece-past-critiques-and-the-path-forward/">IMF chief economist Olivier Blanchard discussed Greece in a blog post</a> (and <a href="http://www.bruegel.org/nc/blog/detail/article/1681-professor-blanchard-writes-a-greek-tragedy/">Ashoka Mody offered a critical response</a>).<br />
<br />
Although some of us think Greece might be better off outside the euro, their willingness to sign on to an agreement of the sort the Syriza govermnment came in to power promising to end (and essentially what they voted "no" on in the referendum a week ago) demonstrates how badly they want to stay in. As long as Greece is saddled with an unsustainable debt, the prospect of a rerun of this drama will remain. But the removal of the immediate threat of a euro exit hopefully will give a short-run boost (<a href="https://medium.com/bull-market/greece-time-to-look-on-the-bright-side-55d86bca9536">Daniel Davies gives some reasons for short-term optimism</a>).<br />
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As for the euro, the last several years have laid bare the institutional shortcomings - some of which are discussed in <a href="http://www.nytimes.com/2015/07/15/opinion/simon-tilford-the-eurozones-fault-lines.html?smid=tw-share">this Simon Tilford column</a> - underscoring the reasons many <a href="http://www.project-syndicate.org/commentary/the-euro--monetary-unity-to-political-disunity">economists were skeptical of the project from the outset</a>. Although political solidarity and continued moves towards integration might have overcome these flaws, the last several weeks have demonstrated that, as a political matter, the sense of commonality needed to make the euro work does not exist.<br />
<br />
<b>Update:</b> <a href="http://www.nytimes.com/2015/07/15/business/international/international-monetary-fund-proposed-greek-debt-relief.html?smid=tw-share">IMF to the rescue (?!)</a>:<br />
<blockquote class="tr_bq">
The <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/i/international_monetary_fund/index.html?inline=nyt-org" title="More articles about the International Monetary Fund.">International Monetary Fund</a>
threatened to withdraw support for Greece’s bailout on Tuesday unless
European leaders agree to substantial debt relief, an immediate
challenge to the region’s plan to rescue the country.</blockquote>
On this, see also <a href="http://www.telegraph.co.uk/finance/economics/11739985/IMF-stuns-Europe-with-call-for-massive-Greek-debt-relief.html">Ambrose Evans-Pritchard</a> and <a href="http://www.nytimes.com/2015/07/15/upshot/the-imf-is-telling-europe-the-euro-doesnt-work.html?abt=0002&abg=1">Josh Barro</a>. A few hours ago I said they had the "capacity to act as the voice of sanity" but I didn't expect them to use it so soon... This made me laugh:<br />
<blockquote class="twitter-tweet" data-cards="hidden" lang="en">
<div dir="ltr" lang="en">
Object to IMF involvement so spite-crazed Germans will insist on it. Then reveal that the IMF agreed with you! <a href="http://t.co/IO4DTpdPJC">pic.twitter.com/IO4DTpdPJC</a></div>
— Matt! (@mattyglesias) <a href="https://twitter.com/mattyglesias/status/621148653756006400">July 15, 2015</a></blockquote>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script>Hmm... at this point, hard to say if this will lead to a better deal, or just blow it up, as Gideon Rachman suggests:
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<blockquote class="twitter-tweet" lang="en">
<div dir="ltr" lang="en">
IMF may not realise it, but they are effectively calling for the break-up of the euro. No way creditor parliaments will buy this</div>
— Gideon Rachman (@gideonrachman) <a href="https://twitter.com/gideonrachman/status/621085335670366208">July 14, 2015</a></blockquote>
<script async="" charset="utf-8" src="//platform.twitter.com/widgets.js"></script>Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-69318204559295390732015-07-09T13:52:00.000-04:002015-07-09T13:52:00.754-04:00Europe's Final Countdown to "Grexit"?The "no" vote in its referendum last Sunday seems to have accelerated the momentum towards a Greek exit for the euro. While there is plenty of room to second-guess the negotiating strategy, I think the Syriza government and Greek voters were right to reject continuing on the same policy path. If they are forced out of the euro (which looks likely), it will be traumatic and disruptive, but the <a href="http://krugman.blogs.nytimes.com/2015/07/09/argentine-lessons-for-greece/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body">experience of Argentina in 2002</a> suggests a fairly quick rebound (from a very low starting point) is possible. <br />
<br />
Ultimately, this may be worse for the rest of Europe - not only does it open up the possibility of future crises by demonstrating the reversibility of the euro, it also demonstrates a fundamental lack of solidarity: the "ever closer union" isn't really that close (<a href="http://www.project-syndicate.org/commentary/greece-referendum-nationalism-democracy-by-dani-rodrik-2015-07">see Dani Rodrik</a> and <a href="http://www.nytimes.com/2015/07/09/business/dealbook/greek-debt-dispute-highlights-prospect-of-a-euro-exit.html?action=click&contentCollection=Europe&module=RelatedCoverage&region=Marginalia&pgtype=article">Peter Eavis</a>).<br />
<br />
<a href="http://www.nytimes.com/2015/07/10/world/europe/greek-debt-talks.html?hp&action=click&pgtype=Homepage&module=photo-spot-region&region=top-news&WT.nav=top-news">Some of Europe's leaders seem recognize this</a>; the main stumbling block in the last-ditch negotiations appears to be on whether some of Greece's debts will be written off (i.e., "restructuring" or "haircut"). The IMF has publicly said that Greece's debt are not sustainable (debt writedowns are part of standard IMF interventions), and the US is urging a writedown.<br />
<br />
Politically, it is easy to see why this is a nonstarter in many of the creditor countries. Some "leadership" is badly needed, particularly in Germany, and doesn't appear to be forthcoming: in the Times, <a href="http://www.nytimes.com/2015/07/09/opinion/germanys-failure-of-vision.html?action=click&pgtype=Homepage&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region&_r=0">Bruce Ackerman calls out Germany's "failure of vision.</a>" <a href="http://www.bloombergview.com/articles/2015-07-01/europe-wants-to-punish-greece-with-exit">Clive Crook argues that the Greeks are being deliberately pushed out</a>. <a href="http://www.nytimes.com/2015/07/08/business/economy/germanys-debt-history-echoed-in-greece.html?smid=tw-share">Eduardo Porter notes</a> that Germany seems to be forgetting that it has been a beneficiary of debt relief (see <a href="http://thewire.in/2015/07/08/thomas-piketty-germany-has-never-repaid-its-debts-it-has-no-right-to-lecture-greece/">also Thomas Piketty</a>). The German stubbornness may be more than just politics - <a href="http://mainlymacro.blogspot.com/2015/07/why-germany-wants-rid-of-greece.html">Simon Wren-Lewis argues part of the problem</a> is that they (naturally) do not want to acknowledge the failure of their economic ideology.<br />
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Last minute negotiations are ongoing... when Syriza first came to power, <a href="http://twentycentparadigms.blogspot.com/2015/02/just-varoufakis-maam.html">the idea of GDP-linked debt</a> was raised. This seems to have fallen off the table, but it might provide a "face saving" way out: the <a href="http://www.bloomberg.com/news/articles/2015-07-08/a-lesson-from-greece-beware-the-prophets-of-boom">IMF's knack for optimistic projections</a> could be helpful in making the value to the creditors appear initially large. Since they would have some equity-like characteristics, replacing the debt with GDP-linked bonds would have some passing similarity to what normally occurs in a corporate bankruptcy, where creditors receive equity stakes (and perhaps this would help make a "fairness" argument). And it actually might work: if the chances of future austerity and/or a euro exit were substantially reduced, Greece should have a chance at some rapid "bounce back" growth. I don't know anything about Greek politics, but I would think that, in the long-run, a government led by an "outsider" party like Syriza might have a better shot at implementing structural reforms like better tax collection.<br />
<br />
See also: <a href="http://mobile.nytimes.com/2015/07/03/business/dealbook/hopeful-start-to-greek-debt-negotiations-quickly-soured.html?_r=0&referrer=">a good "tick-toc" on the negotiations from the Times' Landon Thomas</a> on the breakdown of negotiations last week; <a href="http://www.telegraph.co.uk/finance/economics/11724924/Europe-is-blowing-itself-apart-over-Greece-and-nobody-can-stop-it.html">Ambrose Evans-Pritchard</a>; <a href="http://www.bruegel.org/nc/blog/detail/article/1669-in-bad-faith/#.VZih-tflk_Q.twitter">Ashoka Mody is very harsh</a> on the creditors and the IMF, <a href="http://www.project-syndicate.org/commentary/greece-creditors-prisoners--dilemma-by-daniel-gros-2015-07">Daniel Gros is a bit more sympathetic</a>.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0tag:blogger.com,1999:blog-7439628176985419293.post-71656567916412547312015-06-26T11:51:00.000-04:002015-06-29T09:10:44.053-04:00More Greek Notesperhaps Greece should be printing some notes this weekend...<br />
<br />
Recently, <a href="http://www.cer.org.uk/insights/greece-after-deal-work-solution">Christian Odendahl had a sensible take</a> on what should be done in Greece, but reasonable advice from economists is being overtaken by politics and events. <a href="http://www.washingtonpost.com/opinions/the-modern-greek-tragedy-of-financial-crisis/2015/06/25/2e4e8028-1b74-11e5-ab92-c75ae6ab94b5_story.html?wpisrc=nl_opinions&wpmm=1">Catherine Rampell</a>:<br />
<blockquote class="tr_bq">
Greeks are hoarding cash and sending their savings abroad; by a
conservative estimate, Greek bank deposits have fallen by about
45 percent since their peak in 2009. Recent talk of capital controls and
bank closures has only accelerated this bank run (or, as some have
dubbed it, a “bank jog”), making the banking sector weaker, and, by the
day, even more in need of European assistance. Last week alone, Greeks
withdrew an <a href="http://www.reuters.com/article/2015/06/23/us-eurozone-greece-g4s-idUSKBN0P30TN20150623" title="www.reuters.com">estimated 4 billion euros</a>. For those keeping track, that’s two-and-a-half times what the country owes the IMF at the end of the month. </blockquote>
<a href="https://medium.com/bull-market/the-grexit-mechanism-what-it-means-for-the-future-of-the-euro-1807229b418c">Karl Whelan discusses the connection</a> between a Greek government default, the ECB and a euro exit -- in theory, the ECB could help Greece stay in the euro even if the government defaults, but it doesn't appear inclined to. Ultimately, if the euro is to avoid similar crises in the future, it needs to be robust to a sovereign default.<br />
<br />
Reports over the deal terms being discussed are hardly encouraging. <a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/25/europe-strikes-back-it-seems-to-be-trying-to-push-greece-out-of-the-euro/">Wonkblog's Matt O'Brien writes</a>:<br />
<blockquote class="tr_bq">
Europe is making life so difficult for Greece with such
specific demands for austerity that it almost seems like Europe is
trying to get Greece to leave the euro now. Before this latest showdown,
Greece had actually cut so much that it had a budget surplus
before interest payments...<br />
<br />
But Europe isn't interested in that.
It's interested in making Greece run bigger and bigger budget surpluses,
without much regard for the economic consequences. Not only that, but
Greece has to run surpluses the way Europe wants them to. Never mind
that Greece has already cut its spending a lot, already cut its pensions
a lot, and already reformed its labor markets a lot. There are always
new cuts and new reforms that Europe says will make Greece grow at some
point in the future.<br />
<br />
If this is how it's going to be,
why should Greece stay in the euro? It sure seems like Europe is trying
to force Syriza to do what Syriza said it wouldn't just to prove a
point: don't underestimate the power of the ECB. It's a not-so-subtle
message to the anti-austerity parties in <a href="http://www.ft.com/intl/cms/s/0/ecca8824-b7a3-11e4-981d-00144feab7de.html" target="_blank">Spain</a> and <a href="http://www.telegraph.co.uk/finance/economics/11616002/Europe-faces-second-revolt-as-Portugals-ascendant-Socialists-spurn-austerity.html" target="_blank">Portugal</a> that they have nothing to gain and everything to lose from challenging the budget-cutting status quo.</blockquote>
Although its the EU that deserves most of the blame, the IMF's role has been controversial, too: see <a href="http://www.politico.eu/article/imf-greece-grexit-lagarde-dsk-sex-parties-eurozone/">this Politico article</a> and this <a href="http://www.telegraph.co.uk/finance/economics/11654639/IMF-has-betrayed-its-mission-in-Greece-captive-to-EMU-creditors.html">Ambrose Evans-Pritchard column</a>. At the <a href="http://blog-imfdirect.imf.org/2015/06/14/greece-a-credible-deal-will-require-difficult-decisions-by-all-sides/">IMF's blog chief economist Olivier Blanchard explains</a> what the IMF believes a "credible deal" requires.<br />
<br />
See also: <a href="http://prospect.org/article/what-reform-strange-case-greece-and-europe">James Galbraith</a><a href="https://www.blogger.com/null"> on "reform"</a>, and <a href="http://america.aljazeera.com/opinions/2015/6/three-depressing-lessons-from-the-greek-debt-negotiations.html">Branko Milanovic on what this means for Europe</a>.<br />
<br />
<b>Update (6/29):</b> The <a href="http://www.nytimes.com/2015/06/29/upshot/the-next-few-days-will-transform-greece-and-europe.html?hp&action=click&pgtype=Homepage&module=b-lede-package-region&region=top-news&WT.nav=top-news&abt=0002&abg=1">Greek government has called a referendum and imposed capital controls</a>. See <a href="https://theconversation.com/path-to-grexit-tragedy-paved-by-political-incompetence-43988">Eichengreen</a>, <a href="http://www.nytimes.com/2015/06/29/opinion/paul-krugman-greece-over-the-brink.html?action=click&pgtype=Homepage&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region&_r=0">Krugman</a> and <a href="http://www.project-syndicate.org/commentary/greece-referendum-troika-eurozone-by-joseph-e--stiglitz-2015-06">Stiglitz</a> (and <a href="https://longandvariable.wordpress.com/2015/06/29/greece/">Tony Yates for a take somewhat more critical of the Greek government</a>) <a href="http://www.voxeu.org/article/grexit-staggering-cost-central-bank-dependence">Charles Wyplosz on the ECB</a>, <a href="https://fsaraceno.wordpress.com/2015/06/27/its-the-politics-stupid/">Francisco Saraceno</a> and <a href="http://www.vox.com/2015/6/27/8856297/greece-referendum-euro">Matt Yglesias</a> on the politics, and <a href="http://www.breakingviews.com/hugo-dixon-its-still-possible-to-stop-grexit/21205678.article">Hugo Dixon on how the referendum may play out</a>.Bill Chttp://www.blogger.com/profile/01081319025032071808noreply@blogger.com0