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December 3, 2009

Economist's View - 6 new articles

Savings Gluts and Bubbles

Robin Wells says our current problems began with a global savings glut that was caused by "thrifty Germans, and state-owned enterprises in China – along with governments of other countries, of course, turning a blind eye to the escalating problems." And, she argues, if something isn't done to eliminate the glut, then asset bubbles and instability will continue, "exacerbating income inequality and favoring wealthy bankers and the Chinese elite":

Big savers got us into this mess, as well as big spenders, by Robin Wells, Commentary, Comment is Free: The world is trapped in a global savings glut. It is both the source of our economic woes and an obstacle to the task of pulling ourselves out of the ditch. Worse yet, the glut's continued existence will feed a succession of asset bubbles until we confront it, head on, and find ways to soak up the excess.
Yes, we can blame the City and Wall Street for turning the global savings glut into fissile material. But that's like saying, "hyenas do what hyenas do". Given extraordinarily lax regulation and a flood of money to play with, bankers were just acting according to their incentive schemes. They merely took advantage of the opportunities the glut presented. The real culprits are thrifty Germans, and state-owned enterprises in China – along with governments of other countries, of course, turning a blind eye to the escalating problems.
The flood of savings in the global economy arose from Germany and China's persistent trade surpluses over the last decade. A country with such a surplus sells more to its trading partners than it buys in return. Persistent deficit countries – the US, Britain, Iceland, and the eurozone excluding Germany, France and Italy – sell assets to the surplus countries to pay for their deficits. Thus persistent surplus countries accumulate the assets of persistent deficit countries: in the case of China, US treasury bills; in the case of Germany, Spanish eurobonds, sterling notes, and US sub-prime mortgages.
What makes this a global glut is that the world as a whole is saving more than can be profitably invested. The corollary is that, eventually, those funds will earn less than nothing. And through financial engineering, those losses are now distributed around the world.
What was the cause? Germany's surpluses were a result of its attempt to export its way out of the stagnation arising from the reintegration of east and west Germany, and to support an ageing population. Its excess savings were spread among the investment hotspots of Spain, Portugal, the Baltics, Ireland, Iceland, Britain and the US.
The origins of China's persistent surpluses are more ominous. Data from China's central bank show that the steep rise in income over the last 10 years created by export-led growth largely bypassed ordinary households. In contrast, from 1997 to 2007, corporate profits as a percentage of income nearly doubled, reaching 23%. And the principal beneficiaries were the state-owned enterprises. Politically powerful, they enjoy a privileged position – with cheap government-directed credit, subsidized access to resources, and low wages without worker protections, they effectively transfer income from workers to state-owned enterprises. Unless the government spends some of its huge holdings of US Treasury bonds to help its citizens, or compels state outfits to share their profits with households, one must question whose interests within China are being served by these policies.
The short-term problem of managing the fallout from the savings glut and the longer term problem of ending it both appear devilishly hard. Because hard-hit eurozone countries can't use currency depreciation they face years of grinding asset and wage deflation. To add insult to injury, the European Central Bank's relatively tight monetary policy is better suited to Germany than to devastated deficit economies like Spain.
It is Britain's good fortune to possess a falling pound, which almost certainly will allow it to recover more quickly than troubled eurozone economies. And the UK has dealt forcefully with its crippled banks in comparison to the US. In both countries, however, deregulation of financial markets led to excessively large financial sectors, fuelled by merchandising of the savings glut, leaving them unable to confront the mounting consequent problems.
Until the savings glut is vanquished, asset bubbles and instability will be fed, exacerbating income inequality and favoring wealthy bankers and the Chinese elite. It will continue drawing resources away from productive sectors of the economy and channeling them into high-paying but socially useless financial engineering – or into yet more excess capacity.
Short of a miraculous new technology to soak up the savings glut, a global rebalancing of production and consumption will be necessary. Persistent surplus countries will need to save less and consume more; deficit countries will need to consume less and save more.
In practice Germans will need to overcome their fear of fiscal deficits and become less export-dependent. China will be a harder case. According to the European Chamber of Commerce, China is adding excess production capacity at a breakneck pace. And by keeping the yuan artificially low, it is stymieing global rebalancing. After it recently told the US and Europe to butt out of its currency affairs, western leaders may find the threat of sanctions is the only way to get the attention of China's state-industrial complex. Afflicted eurozone countries should insist on looser monetary policy and curbs that will prevent internal eurozone trade imbalances getting out of hand again.
And eventually, but not until their economies are clearly on the mend, Americans and Britons will have to get their fiscal houses in order. In the end, perhaps we will have learned from this experience just how expensive cheap credit and excessive thrift can be.

"The Civil War in Development Economics"

Anything with the words "Civil War" in it is catching my attention today:

The Civil War in Development Economics, by William Easterly: Few people outside academia realize how badly Randomized Evaluation has polarized academic development economists for and against. My little debate with Sachs seems like gentle whispers by comparison.
Want to understand what's got some so upset and others true believers? A conference volume has just come out from Brookings. At first glance, this is your typical sleepy conference volume, currently ranked on Amazon at #201,635.
But attendees at that conference realized that it was a major showdown between the two sides, and now the volume lays out in plain view the case for the prosecution and the case for the defense of Randomized Evaluation.
OK, self-promotion confession, I am one of the editors of the volume, and was one of the organizers of the conference... Angus Deaton also gave a major luncheon talk at the conference, which was already committed for publication elsewhere. A previous blog discussed his paper.
Here's an imagined dialogue between the two sides on Randomized Evaluation (RE) based on this book:
FOR: Amazing RE power lets us identify causal effect of project treatment on the treated.
AGAINST: Congrats on finding the effect on a few hundred people under particular circumstances, too bad it doesn't apply anywhere else.
FOR: No problem, we can replicate RE to make sure effect applies elsewhere.
AGAINST: Like that's going to happen. Since when is there any academic incentive to replicate already published results? And how do you ever know when you have enough replications of the right kind? You can't EVER make a generic "X works" statement for any development intervention X. Why don't you try some theory about why things work?
FOR: We are now moving in the direction of using RE to test theory about why people behave the way they do.
AGAINST: I think we might be converging on that one. But your advertising has not yet got the message, like the JPAL ad on "best buys on the Millennium Development Goals."
FOR: Well, at least it's better than your crappy macro regressions that never resolve what causes what, and where even the correlations are suspect because of data mining.
AGAINST: OK, you drew some blood with that one. But you are not so holy on data mining either, because you can pick and choose after the research is finished whatever sub-samples give you results, and there is also publication bias that shows positive results but not zero results.
FOR: OK we admit we shouldn't do that, and we should enter all REs into a registry including those with no results.
AGAINST: Good luck with that. By the way, even if do you show something "works," is that enough to get it adopted by politicians and implemented by bureaucrats?
FOR: But voters will want to support politicians who do things that work based on rigorous evidence.
AGAINST: Now you seem naïve about voters as well as politicians. Please be clear: do RE-guided economists know something the local people do not know, or do they have different values on what is good for them? What about tacit knowledge that cannot be tested by RE? Why has RE hardly ever been used for policymaking in developed countries?
FOR: You can take as many potshots as you want, at the end we are producing solid evidence that convinces many people involved in aid.
AGAINST: Well, at least we agree on the on the much larger question of what is not respectable evidence, namely, most of what is currently relied on in development policy discussions. Compared to the evidence-free majority, what unites us is larger than what divides us.

[On the civil war reference: I'm at the University of Oregon, and my brother played football for Oregon State many years ago - he was a defensive end - so to the extent that either of us cares after all these years, it's a Ducks versus Beavers family war as well (the next generation seems to care more than we do).]

Fed Watch: Bubbles and Policy

Tim Duy discusses the type of bubble-popping strategy the Fed ought to pursue:

Bubbles and Policy, by Tim Duy: The Wall Street Journal carried a front page article today detailing changing views at the Federal Reserve regarding the policy treatment of emerging bubbles of speculative activity. Much of the ground has been well tread. Is monetary policy or regulatory policy the best mechanism to address bubbles? I tend to favor the latter category, should we have a regulatory environment that is not essentially captured by those policymakers are supposed to regulate. Interest rate policy is a rather blunt weapon that kills indiscriminately. For instance, I am sympathetic with the view that interest rates were not necessarily too low during the build up of the housing bubble. Indeed, relatively low rates of investment (equipment and software) growth suggests that real rates were actually too high. But capital flowed to housing instead of more productive investment activities because that was the path of least resistance. Policymakers could have chosen to put some grit on that path by, for example, aggressively evaluating lending standards with regards to products such as "Liar's Loans," etc., but chose to follow a hands off approach.
What caught my attention in the article was this passage:
Yet the question of whether and how to tackle bubbles before they burst is becoming a growing concern amid fears of new bubbles developing in commodities markets and in emerging economies. Gold prices are up more than 50% in a year's time. China's Shanghai Composite stock index is up more than 75% this year. Stocks in Brazil are up even more. Oil prices have rebounded. They remain far below last year's peaks but a return to those highs could fuel inflation in goods and services more directly than tech stocks or housing did.
I think it is important to recognize what bubbles should be the focus of Federal Reserve concerns. After all, the Fed is charged with maintaining price stability and maximum sustainable employment in the United States. Why should the Fed be concerned with housing prices in Hong Kong or stock prices in Brazil and China? Don't those bubbles fall under the responsible of foreign central banks? It seems clear that in such cases, the extent of the Fed's concerns should be limited to the regulatory arena. Are US based banks lending into those bubbles, thereby setting the stage for negative feedback loops? If so, raise capital requirements on that lending, tighten underwriting standards, etc. Just don't derail the US recovery by raising rates to pop a bubble in Brazil.
I will admit that oil prices can be a bit more tricky. The gains in oil prices seem silly given ongoing evidence that the world is awash in oil. From the WSJ:
Café owner Ken Kennard sees the glut in the global oil market as a potential environmental threat to this sleepy seaside tourist hub.
Mr. Kennard is worried about a fleet of oil tankers -- almost 40 in all, each packing hundreds of thousands of barrels of crude and oil-derived products -- that have anchored several miles off the coast of southeast England in recent months.
The heavy traffic stems from a near-record excess oil supply, a byproduct of the recession, that is prompting producers to stash oil offshore until they can find customers. The excess supply hasn't stopped oil prices from surging almost 80% this year and padding the pockets of big oil producers like Royal Dutch Shell PLC and the Organization of Petroleum Exporting Countries.
To be sure, some of the rise in the price of oil is attributable to the decline in the Dollar, a natural consequence of low US interest rates and an important channel for the transmission of monetary policy. But it is not clear that higher oil prices necessarily yield additional core inflationary pressure given the current institutional arrangements between labor and management. The recent experience has been that individuals were not able to convert high inflation expectations in 2008 into higher wages. Instead, the opposite occurred as consumption sunk and unemployment skyrocketed. All of which means the Fed would need to think long and hard about leaning against the oil price increase if that entailed contractionary monetary policies; the costs are potentially high relative to the benefits. Here again, though, regulators need to be carefully evaluating the nature of lending into the oil space.
My views on this topic have shifted somewhat over the past two years. In early 2008, I was concerned that the Fed's rush to lower rates was contributing to destructive oil price bubble. But, in retrospect, nations that pegged to the Dollar and thus imported the Fed's easy policy were just as much, if not more, to blame, as those central banks failed to maintain policies appropriate for domestic conditions.
In short, the Fed does need to be aware of the full set of consequences of their policy stance. But bubbles abroad should not prevent the Fed from adopting the right policy stance for the US economy. Indeed, many of the bubbles discussed now clearly should not be the responsibility of the Fed.

"Worrisome Thoughts on the Way to the Jobs Summit"

Robert Reich is looking past the jobs forum, and he's worried:

Worrisome Thoughts on the Way to the Jobs Summit, by Robert Reich: Most ideas for creating more jobs assume jobs will return when the economy recovers. So the immediate goal is to accelerate the process. ...
But here's the real worry. The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that's been going on for years but which the Great Recession has dramatically accelerated.
Under the pressure of this awful recession, many companies have found ways to cut their payrolls for good. They've discovered that new software and computer technologies have made workers in Asia and Latin America just about as productive as Americans, and that the Internet allows far more work to be efficiently outsourced abroad.
This means many Americans won't be rehired unless they're willing to settle for much lower wages and benefits. Today's official unemployment numbers hide the extent to which Americans are already on this path. Among those with jobs, a large and growing number have had to accept lower pay... Or they've lost higher-paying jobs and are now in a new ones that pays less.
Yet reducing unemployment by cutting wages merely exchanges one problem for another. ... So let's be clear: The goal isn't just more jobs. It's more jobs with good wages. Which means the fix isn't just temporary measures to accelerate a jobs recovery, but permanent new investments in the productivity of Americans. What sort of investments? Big ones that span many years: early childhood education for every young child, excellent K-12, fully-funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good health care, more basic R&D that's done here in the U.S.,... a power grid that's up to the task, and so on. Without these sorts of productivity-enhancing investments, a steadily increasing number of Americans will be priced out of competition in world economy. More and more Americans will face a Hobson's choice of no job or a job with lousy wages. It's already happening.

"The Economics and Policy of Illegal Immigration in the United States"

Gordon Hanson on illegal immigration:

The Economics and Policy of Illegal Immigration in the United States, by Gordon H. Hanson: Executive Summary Policymakers across the political spectrum share a belief that high levels of illegal immigration are an indictment of the current immigration policy regime. An estimated 12 million unauthorized immigrants live in the United States, and the past decade saw an average of 500,000 illegal entrants per year. Until recently, the presence of unauthorized immigrants was unofficially tolerated. But since 2001, policymakers have poured huge resources into securing US borders, ports, and airports; and since 2006, a growing range of policies has targeted unauthorized immigrants within the country and their employers.

Notwithstanding these efforts, no agreement has materialized on a system to replace the status quo and, in particular, to divert illegal flows to legal ones. Policy inaction is a result not only of a partisan divide in Washington, but also of the underlying economic reality that despite its faults, illegal immigration has been hugely beneficial to many US employers, often providing benefits that the current legal immigration system does not.

Unauthorized immigrants provide a ready source of manpower in agriculture, construction, food processing, building cleaning and maintenance, and other low-end jobs, at a time when the share of low-skilled native-born individuals in the US labor force has fallen dramatically.

Not only do unauthorized immigrants provide an important source of low-skilled labor, they also respond to market conditions in ways that legal immigration presently cannot, making them particularly appealing to US employers. Illegal inflows broadly track economic performance, rising during periods of expansion and stalling during downturns (including the present one). By contrast, legal flows for low-skilled workers are both very small and relatively unresponsive to economic conditions. Green cards are almost entirely unavailable to low-skilled workers; while the two main low-skilled temporary visa programs (H-2A and H-2B) vary little over the economic cycle and in any case represent scarcely 1 percent of the current unauthorized population, making them an inconsequential component of domestic low-skilled employment.

Despite all this, illegal immigration's overall impact on the US economy is small. Low-skilled native workers who compete with unauthorized immigrants are the clearest losers. US employers, on the other hand, gain from lower labor costs and the ability to use their land, capital, and technology more productively. The stakes are highest for the unauthorized immigrants themselves, who see very substantial income gains after migrating. If we exclude these immigrants from the calculus, however (as domestic policymakers are naturally inclined to do), the small net gain that remains after subtracting US workers' losses from US employers' gains is tiny. And if we account for the small fiscal burden that unauthorized immigrants impose, the overall economic benefit is close enough to zero to be essentially a wash.

Where does this leave policymakers? Any new reform effort will have to take a stand on preventing versus facilitating inflows of low-skilled foreign labor. Legislation is expected to embrace aspects of two different strategies: enforcement strategies designed to prevent illegal immigration, and accommodation strategies designed to divert illegal flows through legal channels using legalization and expanded legal options for future prospective migrants.

Since US spending on enforcement activities is already very high, sizeable increases in enforcement resources could easily cost far more than the tax savings they generated from reduced illegal presence in the United States. Because the net impact of illegal immigration on the US economy does not appear to be very large, one would be hard pressed to justify a substantial increase in spending on border and interior enforcement, at least in terms of its aggregate economic return.

A more constructive immigration policy would aim to generate maximum productivity gains to the US economy while limiting the fiscal cost and keeping enforcement spending contained. Effectively, this means converting existing inflows of illegal immigrants into legal flows. It does not have to mean increasing the total number of low-skilled foreign workers in the labor force. Policies designed to achieve this would:

  • provide sufficient legal channels of entry to low-skilled workers by expanding legal options for immigration while maintaining reasonable enforcement of immigration laws;
  • allow inflows to fluctuate with the economy;
  • create incentives for both employers and immigrants to play by the rules by ensuring meaningful enforcement at US worksites and rewarding workers for their compliance by giving them the chance to seek legal permanent residence; and
  • mitigate the fiscal impact of low-skilled immigration by charging a fee for legal entry or taxing employers.

links for 2009-12-02

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