Death, Taxes and Trade Disputes

Douglas Irwin, Free Trade Under Fire (3rd ed., 2009):

The tuna dispute was resolved in 1992 when the United States, Mexico, and eight other tuna-fishing nations signed an international agreement to regulate the conditions of tuna fishing.

Bridges Trade News Digest, Nov. 16, 2011:

At its last meeting on 11 November, the WTO Dispute Settlement Body (DSB) decided to extend the deadline for submitting an appeal on the latest Tuna-Dolphin (DS381) ruling issued in September (see Bridges Weekly, 21 September 2011).

In light of the Appellate Body’s substantial workload, the US and Mexico had jointly requested an extension of the normally sixty-day period, which otherwise would have expired on 15 November. In accordance with the agreed extension, an appeal will have to be submitted no later than 20 January.

Lesson: never use the word "resolved" when writing about trade disputes....

To be fair to Irwin, whose book I recommend (and assign to students), one could consider "Tuna-Dolphin" to be a series of disputes, one of which was resolved in 1992.

Is the ECB Determined to Go Down with the Ship?

With the risk premium on Italian government debt growing, the best hope for a resolution to the Euro crisis would seem to be for the European Central Bank to announce an unlimited intervention to cap the yield on sovereign bonds.  However, it steadfastly refuses to do so - presumably because it feels that such an action might risk a violation its prime directive of "inflation rates of below, but close to, 2% over the medium term."

In a recent Project Syndicate column, Brad DeLong argued that the ECB is failing to step up to the plate as the lender of last resort:

The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Facility. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.

Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. Modern central banking got its start in the collapse of the British canal boom of the early 1820’s. During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust.

Similarly, Barry Eichengreen writes:

Here’s where the political cover comes into play. Merkel and Sarkozy need to make the case that if the euro is to become a normal currency, Europe needs a normal central bank – one that does not merely target inflation like an automaton, but that also understands its responsibilities as a lender of last resort.

More on this from The Economist, Antonio Fatas, Gavyn Davies and Martin Wolf as well as a nice "news analysis" from the NY Times. 

If Italy is fundamentally solvent and merely facing a self-fulfilling "liquidity" panic (as investors sell bonds, yields rise, making it more costly to service its debts, which lowers the chances it will avoid default leading to investors selling bonds...), then it may not require much more than an announcement of a willingness to intervene to quell the crisis.  By restoring confidence, the ECB could bring yields down without having to do much actual bond-buying (i.e., Super Mario* can be Chuck Norris).

The crisis potentially spells the end of the Euro - so the ECB is putting its mandate ahead of its own self-preservation.  That is, it appears willing to risk its very existence for the sake of what it sees as its duty.  As a matter of economic policy, it looks disastrously foolish, and yet, there's something oddly noble-seeming about it.


*Admittedly, referring to Italian policymakers named Mario as "Super Mario" is getting stale quickly (and I can't imagine how much they must despise it); and the press needs to decide whether it is ECB President Mario Draghi or new Prime Minister Mario Monti who is called "Super Mario" (or perhaps not... a quick search of "Super Mario" on the FT reveals a potentially confusing solution: "Super Mario Brothers").  The Guardian compares two of the "Super Marios" and this FT profile argues Draghi earned his "super."

October Employment: Not Bad

Not really good, either...  The BLS reports that the unemployment rate ticked down to 9.0% (from 9.1%) in October.  Payroll employment increased (weakly) by 80,000; the private sector added 104,000 jobs but the public sector subtracted 24,000.   The numbers from the survey of households (which is used to calculate the unemployment rate) were a bit stronger - the number of people employed rose by 277,000.

Also, the payroll employment growth (from the survey of establishments) figures were revised upwards for August and September, by 57,000 and 55,000, respectively.

On a non-seasonally adjusted basis, the unemployment rate fell to 8.5% and payroll employment rose by 883,000.  That is, October is a month where a regular "seasonal" gain is removed to make the seasonally adjusted number.

Sigh.

NYTimes.com headline:

The Fed's forecasts are here.  Their projection for 2012 real GDP growth is 2.5-2.9%, down from the June estimate of 3.3-3.7%.

Romer: Bernanke's Volcker Moment?

In the Times last weekend, Christina Romer suggested a precedent for a switch in our monetary policy regime.  The Volcker Fed tightened money growth (thereby letting interest rates rise severely - the Fed funds rate was briefly above 19% at a couple of points in 1981) - the point was to bring the hammer down on inflation. As Romer notes, this very unpleasant policy was justified by a shift to a "monetarist" regime of targeting money growth.  As I've discussed before, I have mixed feelings about the lionization of Paul Volcker, but I think Romer has a good point that it may be time for another regime shift, this time to nominal GDP level targeting:

Mr. Bernanke needs to steal a page from the Volcker playbook. To forcefully tackle the unemployment problem, he needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product.
Nominal G.D.P. is just a technical term for the dollar value of everything we produce. It is total output (real G.D.P.) times the current prices we pay. Adopting this target would mean that the Fed is making a commitment to keep nominal G.D.P. on a sensible path. 

Just as Volcker's regime shift provided cover for a controversial action the Fed felt it needed to undertake (extreme tightening) and facilitated a shift in inflation expectations, a shift to a nominal GDP target would make possible (indeed, require) more aggressive expansion and thereby raise inflation expectations (which means lower real interest rates, ceteris paribus).

See also Paul Krugman, who agrees and Binyamin Appelbaum, who reports that the Fed is unmoved. Free Exchange's Greg Ip makes a contrary case and his colleague Ryan Avent responds.

GDP: The Video

Its not exactly "Thriller," but this video from Slate and NPR, starring Simon Johnson, is a relatively zippy exposition of what "Gross Domestic Product" means:

Its the first in a series.

3Q GDP: Is the Recovery Recovering?

The BEA's advance estimate of real GDP growth for the third quarter was 2.5% (annual rate).  That's in the same ballpark as the long-run trend rate of growth - i.e., its a pretty normal growth rate, consistent with maintaining a stable unemployment rate as the labor force and productivity rise over time, but not fast enough to dig the economy out of the hole (14 million unemployed) that its in.  It is, however, a significant improvement over the first two quarters of 2011, which saw growth rates of 0.4% and 1.3%.

Also, this puts real GDP back above its pre-recession (4Q 2007) peak; a milestone we previously thought had been attained at the end of 2010 until the estimates were revised downwards last summer.

More reaction: The Economist's "Free Exchange" blog,  NYT's Catherine Rampell, Calculated Risk, James Hamilton, Mark Thoma, RTE's round up of Wall Street "economists."

The Structure of Macroeconomic Revolutions?

Macroeconomics sometimes appears to be a somewhat confusing swirl of models and "schools of thought." This can be a somewhat off-putting feature to students (though for some of us it is also part of what makes macroeconomics more interesting than microeconomics).  When I introduce it to my students, I make a nod to Thomas Kuhn's "Structure of Scientific Revolutions" framework, which provides a way of putting some structure on the development of macroeconomics that is more sophisticated than framing it as a series of "debates" between "sides" (i.e., "classical" vs. "Keynesian", "saltwater" vs. "freshwater", etc.).

So I liked this post by Matthew Yglesias, where he invokes Kuhn and draws an analogy between macroeconomics and the Copernican revolution in astronomy.  He recounts how Copernican (Earth revolves around the sun) astronomy eventually supplanted Ptolemaic (Earth is center of universe), but initially the Ptolemaic system made much better predictions, and concludes:

My view, with both all due respect and all due derision, is that the Robert Lucas types are like the early Copernicans here. There’s something admirable in their insistence that it ought to all work out to an easily modeled system grounded in compelling theoretically considerations. The New Keynesian model is a mess, like late-Ptolemaic astronomy, thrown together to account for observed reality. But you don’t fly to a moon with an elegant model that delivers mistaken predictions about where the moon’s going to be. And what we actually need is a Kepler to give us an elegant model that actually predicts the phenomena, and then a Newton who can explain what that model means. 

Hmmm... I'm more inclined to place the users of old Keynesian models, including the IS-LM-based macroeconometric models used by policymakers, in the "late-Ptolemaic" role, but, in any case, the Kuhninan approach helps explain why I simultaneously agree with Brad DeLong, Paul Krugman and Greg Mankiw that the IS-LM model remains a very useful tool, while being a little more optimistic than Krugman about the state of macroeconomics.

Also, I'm not sure that Lucas and others (including new Nobel laureate Tom Sargent) who have pushed macroeconomics towards "structural" or "micro-founded" models are leading us to an "easily modeled system." What counts for "elegance" in modern macro is consistency between the macroeconomic model and micro-economically optimal behavior on the part of consumers and firms (I suppose the obvious retort to that is to invoke Emerson: "A foolish consistency is the hobgoblin of little minds").

Eurosnark

A nice column from Floyd Norris on the parallels between Argentina's exit from its dollar peg, and Greece's potential exit from the euro.  It would be messy, in part because there is no legal mechanism in place to do that; or as Norris puts it:

The euro was designed to be the Roach Motel of currencies. Once you enter, you can never leave. There is no provision for departure. 

Hmm... Norris' column might be a good reading for Econ 270, but will Greece still be in the euro by spring semester??

Norris is referencing this vintage TV ad.

September Employment: Partly Cloudy

The BLS reported today that employers added 103,000 people to their payrolls in September, of which 45,000 were workers returning from the Verizon strike.  That's not a great number - due to natural growth in the labor force and productivity improvements, the economy needs to add roughly 130,000 jobs per month just to keep the unemployment rate from rising.  But in light of fears that the economy could be sliding into recession due to the hits on confidence from the debt ceiling fiasco and Europe's woes, a continuation of the pattern of sluggish employment growth may be somewhat of a relief.  Also, July employment growth was revised up from 85,000 to 127,000 and August was revised from 0 to 57,000.

The numbers from the household survey (which has a smaller sample, so is considered less reliable) were more encouraging.  The unemployment rate held steady at 9.1%.  The number of people employed rose by 398,000, but the reason that didn't bring the unemployment rate down is that the labor force grew by 423,000 and the labor force participation rate ticked up to from 64.0% to 64.2%.  The unemployment rate is measured as a percentage of the labor force, and to be counted as in the labor force, someone must report that they are working or looking for work, so this is a sign that people are re-entering the labor force, which may mean that they are more encouraged about prospects of finding a job.

Overall, the economy remains in a deep hole, with nearly 14 million people unemployed, 6.2 million of whom have been out of work for 27 weeks or longer.  Government continues to be a drag on employment (i.e., the exact opposite of what it should be doing); government payrolls fell by 34,000 in September.  The BLS noted that local government employment has fallen by 535,000 since September 2008 (more on this from Floyd Norris).

On a non-seasonally adjusted basis, the unemployment rate fell to 8.8% in September and payroll employment rose by 519,000.  That is, September is a month that normally sees an improvement in the employment picture, which is removed by the seasonal adjustment factor.

More reaction: Calculated Risk, Mark Thoma, RTE's round up of Wall St. "economists".