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November 9, 2009

Economist's View - 6 new articles

"Not All Bubbles Present a Risk to the Economy"

Frederic Mishkin says there's no reason to worry that a new bubble is inflating:

Not all bubbles present a risk to the economy, by Frederic Mishkin, Commentary, Financial Times: There is increasing concern that we may be experiencing another round of asset-price bubbles that could pose great danger to the economy. Does this danger provide a case for the US Federal Reserve to exit from its zero-interest-rate policy sooner rather than later, as many commentators have suggested? The answer is no. ...
Asset-price bubbles can be separated into two categories. The first and dangerous category is ... "a credit boom bubble", in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues.
Eventually, the bubble bursts and asset prices collapse, leading to a reversal of the feedback loop. ... Indeed, this is what the recent crisis has been all about.
The second category of bubble, what I call the "pure irrational exuberance bubble", is far less dangerous because it does not involve the cycle of leveraging against higher asset values. Without a credit boom, the bursting of the bubble does not cause the financial system to seize up and so does much less damage. For example, the bubble in technology stocks in the late 1990s was not fueled by a feedback loop between bank lending and rising equity values... This is one of the key reasons that the bursting of the bubble was followed by a relatively mild recession. ...
Because the second category of bubble does not present the same dangers ... as a credit boom bubble, the case for tightening monetary policy to restrain a pure irrational exuberance bubble is much weaker. ... Nonetheless, if a bubble poses a sufficient danger to the economy as credit boom bubbles do, there might be a case for monetary policy to step in. ...
But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy.

Tightening monetary policy in the US or Europe to restrain a possible bubble makes no sense... At this critical juncture, the Fed must not take its eye off the ball by focusing on possible asset-price bubbles that are not of the dangerous, credit boom variety.

I've mostly heard the worries expressed in terms of inflation. I think the risks are asymmetric. Raising rates too soon and sending the economy tumbling back into a recession is much more costly than an outbreak of inflation that persists until the Fed can bring it back under control.

Brad DeLong Celebrates His DMCA Takedown Notice

In the first year or so after I started doing this I had one or two discussions about the length of excerpts, and I've always complied with any request (though not without first trying to negotiate, which was more than successful in one case), but my only literal take down request was from the Reserve Bank of Australia. I still don't understand that one. (When I asked why, they said that if, say, a graph that was part of the post was found to be in error and they changed it, the error would persist on my site. I decided to comply even though it wasn't an official DMCA notice since if their quality was so bad that that was a significant worry, I didn't want their stuff on my site anyway):

In Celebration of a DMCA Takedown Notice: I Link to Elizabeth Kolbert on "SuperFreakonomics", by Brad DeLong: Well, this is new. My first ever DMCA takedown notice--from HarperCollins, publisher of Levitt and Dubner's Superfreakonomics. While other publishers these days are happy to have sample chapters of their authors' works read and distributed on the internet, not so with HarperCollins.
One thing I can do in response is--tit-for-tat--to remove my praise of and link to E.M. Halliday's Understanding Thomas Jefferson: there are other better (albeit longer) Jefferson biographies published by firms that have not sent me DMCA notices: read them instead.
I urge everybody--authors and readers alike--to just say no to HarperCollins in the future.
A second thing I can do is to link to Elizabeth Kolbert's review of Superfreaknomics in the New Yorker:
"SuperFreakonomics" and climate change: Then, almost overnight, the crisis passed.... By 1912, autos in New York outnumbered horses, and in 1917 the city's last horse-drawn streetcar made its final run. All the anxieties about a metropolis inundated by ordure had been misplaced.
This story—call it the Parable of Horseshit—has been told many times, with varying aims. The latest iteration is offered by Steven D. Levitt and Stephen J. Dubner, in their new book, "SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance".... Levitt and Dubner tell the horseshit story as a prelude to discussing climate change: "Just as equine activity once threatened to stomp out civilization, there is now a fear that human activity will do the same." As usual, they say, the anxiety is unwarranted. First, the global-warming threat has been exaggerated; there is uncertainty about how, exactly, the earth will respond to rising CO2 levels, and uncertainty has "a nasty way of making us conjure up the very worst possibilities." Second, solutions are bound to present themselves: "Technological fixes are often far simpler, and therefore cheaper, than the doomsayers could have imagined."
Levitt and Dubner have in mind a very particular kind of "technological fix." Wind turbines, solar cells, biofuels—these are all, in their view, more trouble than they're worth. Such technologies are aimed at reducing CO2 emissions, which is the wrong goal, they say. Cutting back is difficult and, finally, annoying. Who really wants to use less oil? This sounds, the pair write, "like wearing sackcloth." Wouldn't it be simpler just to re├źngineer the planet?... "Once you eliminate the moralism and the angst, the task of reversing global warming boils down to a straightforward engineering problem," Levitt and Dubner write....
Neither Levitt, an economist, nor Dubner, a journalist, has any training in climate science—or, for that matter, in science of any kind. It's their contention that they don't need it. The whole conceit behind "SuperFreakonomics" and, before that, "Freakonomics," which sold some four million copies, is that a dispassionate, statistically minded thinker can find patterns and answers in the data that those who are emotionally invested in the material will have missed.... Levitt and Dubner claim to have solved the mystery of why crime, after soaring in the nineteen-eighties, dropped in the nineteen-nineties.... They also have proved—at least to their own satisfaction—that names like Ansley and Philippa will be popular for girls in the coming decade, that reading to your kids doesn't matter, and that drunks should be encouraged to drive rather than walk.
Given their emphasis on cold, hard numbers, it's noteworthy that Levitt and Dubner ignore what are, by now, whole libraries' worth of data on global warming. Indeed, just about everything they have to say on the topic is, factually speaking, wrong. Among the many matters they misrepresent are: the significance of carbon emissions as a climate-forcing agent, the mechanics of climate modelling, the temperature record of the past decade, and the climate history of the past several hundred thousand years. Raymond T. Pierrehumbert is a climatologist who, like Levitt, teaches at the University of Chicago. In a particularly scathing critique, he composed an open letter to Levitt, which he posted on the blog RealClimate....
But what's most troubling about "SuperFreakonomics" is... [t]hough climate change is a grave problem, Levitt and Dubner treat it mainly as an opportunity to show how clever they are.... Among the many likely consequences of shooting SO2 above the clouds would be new regional weather patterns (after major volcanic eruptions, Asia and Africa have a nasty tendency to experience drought).... There are eminent scientists—among them the Nobel Prize-winning chemist Paul Crutzen—who argue that geoengineering should be seriously studied, but only with the understanding that it represents a risky, last-ditch attempt to avert catastrophe. "By far the preferred way" to confront climate change, Crutzen has written, "is to lower the emissions of greenhouse gases."...
To be skeptical of climate models and credulous about things like carbon-eating trees and cloudmaking machinery and hoses that shoot sulfur into the sky is to replace a faith in science with a belief in science fiction. This is the turn that "SuperFreakonomics" takes, even as its authors repeatedly extoll their hard-headedness. All of which goes to show that, while some forms of horseshit are no longer a problem, others will always be with us.

Paul Krugman: Paranoia Strikes Deep

If the economic crisis allows Republicans to gain enough ground in the midterm elections to gridlock government, watch out:

Paranoia Strikes Deep, by Paul Krugman, Commentary, NY Times: Last Thursday there was a rally outside the U.S. Capitol to protest pending health care legislation, featuring the kinds of things we've grown accustomed to, including large signs showing piles of bodies at Dachau with the caption "National Socialist Healthcare." It was grotesque — and it was also ominous. For what we may be seeing is America starting to be Californiafied.
The key thing to understand about that rally is that it wasn't a fringe event. It was sponsored by the House Republican leadership — in fact, it was officially billed as a G.O.P. press conference. Senior lawmakers were in attendance, and apparently had no problem with the tone of the proceedings.
True, Eric Cantor, the second-ranking House Republican, offered some mild criticism after the fact. But the operative word is "mild." The signs were "inappropriate," said his spokesman, and the use of Hitler comparisons by such people as Rush Limbaugh, said Mr. Cantor, "conjures up images that frankly are not, I think, very helpful."
What all this shows is that the G.O.P. has been taken over by the people it used to exploit. … Conservatives had long believed that history was on their side, so the G.O.P. establishment could, in effect, urge hard-right activists to wait just a little longer: once the party consolidated its hold on power, they'd get what they wanted. After the Democratic sweep, however, extremists could no longer be fobbed off with promises of future glory.
Furthermore, the loss of both Congress and the White House left a power vacuum in a party accustomed to top-down management. At this point Newt Gingrich is what passes for a sober, reasonable elder statesman of the G.O.P. And he has no authority: Republican voters ignored his call to support a relatively moderate, electable candidate in New York's special Congressional election.
Real power in the party rests, instead, with the likes of Rush Limbaugh, Glenn Beck and Sarah Palin (who at this point is more a media figure than a conventional politician). Because these people aren't interested in actually governing, they feed the base's frenzy instead of trying to curb or channel it. So all the old restraints are gone.
In the short run, this may help Democrats, as it did in that New York race. But maybe not: elections aren't necessarily won by the candidate with the most rational argument. They're often determined, instead, by events and economic conditions.
In fact, the party of Limbaugh and Beck could well make major gains in the midterm elections. The Obama administration's job-creation efforts have fallen short, so that unemployment is likely to stay disastrously high through next year and beyond. The banker-friendly bailout of Wall Street has angered voters, and might even let Republicans claim the mantle of economic populism. Conservatives may not have better ideas, but voters might support them out of sheer frustration.
And if Tea Party Republicans do win big next year, what has already happened in California could happen at the national level. In California, the G.O.P. has essentially shrunk down to a rump party with no interest in actually governing — but that rump remains big enough to prevent anyone else from dealing with the state's fiscal crisis. If this happens to America as a whole, as it all too easily could, the country could become effectively ungovernable in the midst of an ongoing economic disaster.
The point is that the takeover of the Republican Party by the irrational right is no laughing matter. Something unprecedented is happening here — and it's very bad for America.

"The World Needs a New Financial Architecture"

George Soros says we need a new world order.

After talking about the need for a new Bretton Woods conference to "establish new international rules, including treatment of financial institutions that are too big to fail and the role of capital controls," and the need for the IMF to "to reflect better the prevailing pecking order among states and to revise its methods of operation," he says:

World needs new financial architecture, by George Soros, Commentary, Project Syndicate: ...Reorganising the world order will need to extend beyond the financial system and involve the United Nations, especially membership of the Security Council. ...China and other developing countries ought to participate as equals. They are reluctant members of the Bretton Woods institutions, which are dominated by countries that are no longer dominant. ...
The system cannot survive in its present form, and the US has more to lose by not being in the forefront of reforming it. The US is still in a position to lead the world, but, without far-sighted leadership, its relative position is likely to continue to erode. It can no longer impose its will on others, as George W Bush's administration sought to do, but it could lead a co-operative effort to involve both the developed and the developing world, thereby reestablishing American leadership in an acceptable form.
The alternative is frightening, because a declining superpower losing both political and economic dominance but still preserving military supremacy is a dangerous mix. We used to be reassured by the generalization that democratic countries seek peace. After the Bush presidency, that rule no longer holds, if it ever did.
In fact, democracy is in deep trouble in America. The financial crisis has inflicted hardship on a population that does not like to face harsh reality. President Barack Obama has deployed the "confidence multiplier" and claims to have contained the recession. But if there is a "double dip" recession, Americans will become susceptible to all kinds of fear mongering and populist demagogy.
If Obama fails, the next administration will be sorely tempted to create some diversion from troubles at home – at great peril to the world.

Obama has the right vision. He believes in international co-operation, rather than the might-is-right philosophy of the Bush-Cheney era. ...

What is lacking, however, is a general recognition that the system is broken and needs to be reinvented. ... Obama is preoccupied by many pressing problems,... reinventing the international financial system is unlikely to receive his full attention.

China's leadership needs to be even more far-sighted than Obama is. China is replacing the American consumer as the motor of the world economy. Since it is a smaller motor, the world economy will grow slower, but China's influence will rise very fast.

For the time being, the Chinese public is willing to subordinate its individual freedom to political stability and economic advancement. But that may not continue indefinitely – and the rest of the world will never subordinate its freedom to the prosperity of the Chinese state.

As China becomes a world leader, it must transform itself into a more open society that the rest of the world is willing to accept as a world leader. Military power relations being what they are, China has no alternative to peaceful, harmonious development. Indeed, the future of the world depends on it.

"There are Families Not Eating at the End of the Month"

From Calculated Risk:

WalMart: Quote of the Night, by Calculated Risk: A quote from a conference this weekend, from the NY Times:

"There are families not eating at the end of the month," said Stephen Quinn, executive vice president and chief marketing officer at Wal-Mart Stores, and "literally lining up at midnight" at Wal-Mart stores waiting to buy food when paychecks or government checks land in their accounts.

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