This site has moved to
The posts below are backup copies from the new site.

March 12, 2009

Economist's View - 5 new articles

"Macroeconomic Imbalances and the Current Recession"

Antonio Fatás:

Macroeconomic imbalances and the current recession, by Antonio Fatás: While there is no doubt that the current recession is fundamentally linked to excesses in financial markets and asset prices, there were still some classic macroeconomic imbalances that preceded the crisis. For years we have been talking about global imbalances and how certain advanced economies (the US in particular) were building large deficits. A current account deficit is simply a measure of the difference between spending and income for a country. ... In the case of the US, consumption grew to levels that we had never seen before. The chart below displays household consumption as a ratio to GDP for the US and four other advanced economies.

This is a ratio that we expect to be fairly constant for a country with stable growth rates (as it is the case for these economies). In fact, in the cases of Germany, France and Japan, consumption remains fairly stable during the sample, as we expect. It is true that in the case of Japan we see the ratio increasing in the 70s but this has an explanation: as convergence in living standards materializes, the country's saving rate goes down...

The US, and to a much smaller extent the UK, have seen consumption increasing at rates much faster than GDP for the last two decades. ... How could this trend be justified? For this number to go up, a combination of these things should happen:

  • Lower taxes (current or future) that increase disposable income
  • Expectations of larger future income (through faster productivity growth
  • Related to the previous one, expectations of more productive investment which reduces the need to save and invest to generate the same amount of future income
  • A demographic transition that makes the future (income or wealth) look "better" than the present.

While one can always debate about whether some of these assumptions were reasonable during the last decades, overall one finds more arguments that go in the opposite direction and might have justified a lower consumption rate. An aging population and a growing government debt make the future look worse than the present. If anything, there is the need to increase saving... In terms of productivity growth.., there is no consistent signal that productivity growth is accelerating dramatically in the US or UK...

How can it be that in the light of such strong evidence of a macroeconomic imbalance very little was done about it? During those years asset and housing prices were booming and this was used as a justification for the consumption increase... Of course, for this to be true those asset prices had to be sustainable and this could only happen if one of the arguments above was true...

Today's perspective is, of course, very different as asset prices have collapsed and consumption looks also very high relative to wealth; it is clear that these imbalances need to be addressed. Unfortunately, this is the wrong time to address such an imbalance. In the middle of a deep recession, economic policies work to stimulate consumption, not depress it. ... No surprise that policy makers, such as Larry Summers today in an interview with the FT, are making the arguments that this is not the time to save. Point taken but let's make sure that when we are out of the recession we look back at this chart and make a conscious decision to avoid these growing imbalances reappear again in the future.

I don't think we can avoid higher savings no matter how much policymakers plead, and I'm not sure that's desirable since there are holes in household balance sheets that need to be filled, and we will see higher savings rates until that is accomplished. That's why it's up to government to create the necessary demand levels needed to stop the downward movement in the economy, it's unlikely to come from the household sector. But I do agree that once we get to the other side, the ratios will need to change, what we had before is demonstrably unsustainable.

Using the Crisis as an Excuse

Andrew Leonard had a post entitled The silliest Republican economic proposal yet. He may want to reconsider that call:

Republicans Propose 'No Cost' Stimulus, Fox News: SEAN HANNITY, HOST: And in "Your America" tonight, another economic plan is also emerging tonight. The Republicans have proposed an alternative to the president's $787 billion stimulus package, and it costs a little bit less. Zero dollars. And it also promises to create two million new jobs without any of your money.

Joining us Congressman John Shadegg and Senator David Vitter. They're here to explain.

All right. Now we keep hearing from the Democrats well, the Republicans, they need to — they need an alternative proposal. You have an alternative proposal.

Congressman Shadegg, we'll start with you.

JOHN SHADEGG (R), ARIZONA CONGRESSMAN: We do have an alternative proposal. It looks at the fact that we spent billions of dollars on this stimulus package taxing the American people and burdening future generations with little to show for it. And many of us believe it will not produce Americans jobs.

With unemployment rates going up how can we produce American jobs? And the answer is we have had a non-energy policy in this country for a very long time. The reality is we are giving jobs to oil fieldworkers and natural gas fieldworkers in Russia and Saudi Arabia and Venezuela, when we should be putting those people to work here in the United States.


SHADEGG: Now Senator Vitter and I have drafted a bill that says let's put Americans to work, let's pursue the fight we had last summer of an all of the above energy strategy, let's clear the bureaucracy out of the way, and let's move forward with American jobs, producing American energy. ...

So opening ANWR and easing restrictions on offshore drilling is (a) free (never mind the potential environmental costs, those don't count if you're a Republican), and (b) will create 2 million jobs by taking them from other countries (the jobs will come from commies and terrorists, foreigners in any case, so no problem there, no need to count the costs to those workers).

This is, of course, silly and simply a way to use the crisis to push a favorite Republican proposal, something they do routinely (a terrorist threat? looks like we need another tax cut...). But I'm curious why the standard Republican objection to attempted job creation through changes in taxes or spending - that the jobs will simply be taken from other industries - doesn't apply here (if the jobs do come from other industries, it's not "costless" as claimed). Or are there, as Democrats claim, idle resources sitting around just waiting to be put back to work? [Note: Comments point out - correctly - that talking about short-run tradeoffs for this policy is silly since most estimates don't anticipate much job creation from relaxing these restrictions, and the jobs that would be created don't appear for several years. That is, this does nothing to stimulate the economy to use idel resources in the short-run.]

Class Warfare?

John Berry:

If Tax-Cut Lapsing Is Class Warfare, Let's Fight, by John M. Berry, Commentary, Bloomberg: If letting top income-tax rates go back to where they were in 2000 is class warfare against the rich, I'm ready to snap to attention with my old M1 rifle on my shoulder.

What a ridiculous label, class warfare. It's hardly aggression against any class to have a progressive income-tax system in which fairness and ability to pay are important considerations in setting rates for different income groups.

As far as the top tax rates are concerned,... The law already calls for today's 33 percent rate to go to 36 percent and the 35 percent rate to rise to 39.6 percent, in 2011.

Why did a Republican Congress and President George W. Bush countenance the 2011 expiration dates in the 2001 tax-cut bill? It was one of several deceitful provisions that made rate reductions temporary to hold down estimates of revenue loss. Of course, the GOP intended all along to make the rate cuts permanent.

Obama would let the Bush rate cuts expire only for couples with incomes above $250,000 ... and raise the rates for them on capital gains and dividends to 20 percent from 15 percent.

Unfair? I don't think so, given these earners' relatively greater ability to bear the added burden. There's no doubt that a larger share of the nation's income has become concentrated at the very top of the distribution.

The extra revenue would be used to help finance the government's necessary role in dealing with the dangers of climate change and improving access to health care and control of its costs. ...

The Obama plan would give most taxpayers small reductions in tax liabilities...

When Clinton proposed raising the top rates to 36 percent and 39.6 percent in 1993, there were plenty of predictions that the higher marginal rates would hurt Americans' willingness to work and invest. Some economists argued that so many people would opt for leisure instead of work that the higher rates would raise no additional revenue.

Instead, a boom ensued in the latter 1990s... What did Bush's lower rates produce? Mediocre growth, very large deficits and financial-market manipulation.

The reality is that tax rates aren't nearly as powerful a force as some people think they are. ...

Who Built the House of Cards?

Were chief executives at financial firms caught in "a financial tsunami" beyond their control, or are they partly responsible for what happened?:

A Tsunami of Excuses, by William Cohan, Commentary, NY Times: It's been a year since Bear Stearns collapsed, kicking off Wall Street's meltdown, and it's more than time to debunk the myths that many Wall Street executives have perpetrated about what has happened and why. These tall tales ... tend to take the form of how their firms were the "victims" of a "once-in-a-lifetime tsunami" that nothing could have prevented...

Take, for example, the myth that Alan Schwartz, the former chief executive of Bear Stearns, unleashed on the Senate Banking Committee... "Looking backwards and with hindsight, saying, 'If I'd have known exactly the forces that were coming, what actions could we have taken beforehand to have avoided this situation?' And I just simply have not been able to come up with anything ... that would have made a difference..." ...

Dick Fuld, the longtime chief executive of Lehman Brothers ... told Congress: "I wake up every single night thinking, 'What could I have done differently?'... And I have searched myself every single night. And I come back to this: at the time I made those decisions, I made those decisions with the information I had." Harvey Miller, the bankruptcy lawyer who is representing what remains of Lehman, has been working hard to absolve Mr. Fuld ... wrote, "The comptroller fails to recognize that Lehman was a victim of a financial tsunami that was beyond its control."

Now, wait just a minute here. Can it possibly be true that veteran Wall Street executives like Messrs. ... Schwartz and Fuld — who were paid an estimated ... $117 million and at least $350 million, respectively, in the five years before their businesses imploded — got all that money but were clueless about the risks they had exposed their firms to in the process?

In fact, although they have not chosen to admit it, many of these top bankers ... made decision after decision, year after year, that turned their firms into houses of cards. ...

Could these Wall Street executives have made other, less risky choices? Of course they could have, if they had been motivated by something other than absolute greed. Many smaller firms ... took one look at those risky securities and decided to steer clear. When I worked at Lazard in the 1990s, people tried to convince the firm's patriarchs ... that they must expand into riskier lines of business to keep pace with the big boys. The answer was always a firm no. ...

So enough already with the charade of Wall Street executives pretending not to know what really happened and why. They know precisely why their banks either crashed or are alive only thanks to taxpayer-provided life support. And at least one of them — John Mack, the chief executive of Morgan Stanley — seems willing to admit it. ... "The events of the past months have ... made clear the need for profound change to that system. At Morgan Stanley, we've dramatically brought down our leverage, increased transparency, reduced our level of risk and made changes to how we pay people." He continued: "We didn't do everything right. Far from it. And ... I take responsibility for our performance."

Well, it's a start. But there can be no restoration of confidence in the banking system — and therefore no hope for an economic recovery — until Wall Street comes clean. If the executives responsible for what happened won't step forward on their own, perhaps a subpoena-wielding panel along the lines of the 9/11 commission can be created to administer a little truth serum.

Many people want more than just an admission of responsibility, but I don't think economic recovery depends upon that happening.

links for 2009-03-12

No comments: