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April 30, 2009

Economist's View - 4 new articles

Does the U.S. Need an Auto Industry?

At the NY Times Room for Debate, the question is Does the U.S. Need an Auto Industry? My answer is here, and there are also responses from Tyler Cowen and Robert Lawrence. Update: Robert Reich and Deborah Swenson also respond.

Feldstein: Deflation Raises Questions about Global Recovery

Martin Feldstein has two worries. He's worried about deflation in the short-run, and about inflation in the longer run:

Deflation raises questions about global recovery, by Martin Feldstein, Project Syndicate: The rate of inflation is now close to zero in the US and several other major countries. The Economist recently reported that economists it had surveyed predict that consumer prices in the US and Japan will actually fall this year as a whole, while inflation in the euro zone will be only 0.6 percent. South Korea, Taiwan and Thailand will also see declines in consumer price levels. ...

Deflation is potentially a very serious problem, because falling prices — and the expectation that prices will continue to fall — would make the current economic downturn worse in three distinct ways. The most direct adverse impact of deflation is to increase the real value of debt. ... [T]he price level could conceivably fall by a cumulative 10 percent over the next few years. If that happens, a homeowner with a mortgage would see the real value of his debt rise by 10 percent. Since price declines would bring with them wage declines, the ratio of monthly mortgage payments to wage income would rise. In addition..., deflation would mean higher loan-to-value ratios for homeowners, leading to increased mortgage defaults... A lower price level would also increase the real value of business debt, weakening balance sheets and thus making it harder for companies to get additional credit. The second adverse effect of deflation is to raise the real interest rate... Because ... central banks have driven their short-term interest rates close to zero, they cannot lower rates further in order to prevent deflation from raising the real rate of interest. Higher real interest rates discourage credit-financed purchases by households and businesses. This weakens overall demand, leading to steeper declines in prices. The resulting unusual economic environment of falling prices and wages can also have a damaging psychological impact on households and businesses. ... If prices fall at a rate of 1 percent, could they fall at a rate of 10 percent? ... Such worries undermine confidence and make it harder to boost economic activity. Some economists have said that the best way to deal with deflation is for the central bank to flood the economy with money in order to persuade the public that inflation will rise in the future... In fact, the Federal Reserve, the Bank of England, and the Bank of Japan are doing just that under the name of "quantitative easing." Not surprisingly, central bankers who are committed to a formal or informal inflation target of about 2 percent per year are unwilling to abandon their mandates openly and to assert that they are pursuing a high rate of inflation. Nevertheless, their expansionary actions have helped to raise long-term inflation expectations toward the target levels. ... Ironically, although central banks are now focused on the problem of deflation, the more serious risk for the longer term is that inflation will rise rapidly as their economies recover and banks use the large volumes of recently accumulated reserves to create loans that expand spending and demand.

"No Time to Dither"

Brad DeLong:

There is no time to dither in a meltdown, by J. Bradford DeLong, Project Syndicate: Are the world's governments capable of keeping the world economy out of a deep and long depression? Three months ago, I would have said yes, without question. Now, I am not so certain.

The problem is not that governments are unsure about what to do. The standard checklist of what to do in a financial crisis ... has been gradually worked out over two centuries...

The problem comes when expansionary monetary policy ... and central-bank guarantees of orderly markets prove insufficient. Economists disagree about when ... governments should move beyond these first two items on the checklist. Should governments try to increase monetary velocity by selling bonds, thereby boosting short-term interest rates? Should they employ unemployed workers directly, or indirectly, by bringing forward expenditures or expanding the scale of government programs? Should they explicitly guarantee large financial institutions' liabilities and/or classes of assets? Should they buy up assets at what they believe is a discount from their long-run values, or buy up assets that private investors are unwilling to trade, even at a premium above their likely long-run values? Should governments recapitalize or nationalize banks? Should they keep printing money even after exhausting their ability to inject extra liquidity into the economy via conventional open-market operations, which is now the case in the United States and elsewhere? Three months ago, I said that ... trying a combination of these items - even a confused and haphazard combination - was better than doing nothing. All five of the world's major economies implemented their own confused and haphazard combinations of monetary, fiscal, and banking stimulus policies during the Great Depression, and the sooner they did - the sooner each began its own New Deal - the better. ... The conclusion that I draw from this is that we should try a combination of all checklist measures - quantitative monetary easing; bank guarantees, purchases, recapitalizations, and nationalizations; direct fiscal spending and debt issues - while ensuring that we can do so fast enough and on a large enough scale to do the job. Yet I am told that the chances of getting more money in the US for an extra round of fiscal stimulus this year is zero, as is the chance of getting more money this year to intervene in the banking system on an even larger scale than America's Troubled Asset Relief Program (TARP). There is an 80 percent chance that waiting until 2010 and seeing what policies look appropriate then would not be disastrous. But that means that there is a 20 percent chance that it would be.

links for 2009-04-30

April 28, 2009

Economist's View - 6 new articles

"A Discussion With Nobel Laureates in Economics"

Here is the Nobel lunch panel video I said I'd post. Topics include the value of economics, macroeconomics in particular, regulation, inequality, rationality, and efficient markets. Among other things, I was surprised to hear Becker support regulation, so long as it is automatic rather than discretionary (though Scholes disagrees):

Lunch Panel: A Discussion With Nobel Laureates in Economics: Whither Capitalism?:


  • Gary Becker, Nobel Laureate, 1992; University Professor of Economics and Sociology, University of Chicago
  • Roger Myerson, Nobel Laureate, 2007; Glen A. Lloyd Distinguished Service Professor in Economics, University of Chicago
  • Myron Scholes, Nobel Laureate, 1997; Chairman, Platinum Grove Asset Management


  • Michael Milken, Chairman, Milken Institute

It's become a Global Conference tradition for Michael Milken to moderate a discussion with Nobel laureates in economics, and this year is no exception. Topic A will be "whither capitalism" — that is, how the wrenching events of the last year will affect the long-term prospects of the global economy. Expect provocative commentary on subjects ranging from the logic of bank bailouts to the relevance of Japan's lost decade to President Obama's determination to tackle health-care reform. But if past performance is any indicator, don't be surprised if the conversation veers into terra incognito — great economists have a way of claiming the whole world of ideas as their own.

Update: Paul Kedrosky: "Did you enjoy the 'up with economists session?" That's a good summary of the session...

The Business Card Index?

I'm hoping to post a video to the Lunch Panel: A Discussion With Nobel Laureates in Economics: Whither Capitalism? soon. But for the moment, an observation. One thing I was interested in is the change in the attitudes of participants between last year's meeting and this year's. It's hard to find such a difference in the panelists, though I would say they are more defensive and ready to deflect blame for what has happened for what happened (to government for the most part, you can judge one instance of this for yourself when the video is posted). But a big difference is that last year I was given more business cards than I knew what to do with, it was a huge stack. You could hardly turn around without someone introducing themselves, and offering their card. It probably made a big impression on me because, as an academic, I have never bothered to get nor had much use for a business card, and I found myself apologizing for that every time somebody else would hawk their card.

So I made up my mind I'd have cards this year, but one day turned into another, and on the way down I realized I'd never bothered to actually do that. I figured I'd just apologize again for not having a card to exchange, just like last year, but amazingly so far it hasn't been necessary. I haven't been given a single card. Not one. Then I wondered, is it just me? So I've been paying attention to what goes on at the tables as people sit down, and it's just not like last year as far as I can observe.

Not sure what that means, exactly, and it's certainly not statistically validated other than through my own limited observations and a few questions of others about whether they've noticed the same thing, but it does seem like people - as you would expect - have pulled back considerably in the search for ways to expand their businesses, make new connections, etc. But it's not clear tome why the value of netwrking would have fallen so much due to the recession.

"Palliative Measures ... Have to be Attached to Curative Measures"

Steve Waldman says "we need a root-and-branch reorganization of the financial system":

Value for value, Steve Waldman: Would it have been better if Timothy Geithner had had the power to guarantee all bank debt early on? As James Surowiecki reminds us, that was part of the Swedish solution. Justin Fox plausibly suggests that we might have avoided a lot of pain with a fast, full guarantee.

But that's not the point. The question isn't whether we could have avoided this crisis, if only we had cut a big check. We could have, and that was not lost to any of us debating these issues more than a year ago. (See e.g. me or Mark Thoma.) Had we done so, the near-to-medium term fiscal costs might have been less than they probably will be now. So, with 20/20 hindsight, would it have been a good idea?

How you answer that question depends upon how you view the crisis. Is it an aberration, a shock to a basically sound financial system, or is it a painful symptom of an even more dangerous condition? ...

If you think that our financial system just needs some tweaks, some consolidation of regulators' organizational charts and sterner supervision, then you should prefer that we had just cut a check, passed Sarbanes/Oxley Book II, and moved on. But that is not what I, or most proponents of nationalization temporary receivership for insolvent banks, believe.

If you believe, as I do, that we need a root-and-branch reorganization of the financial system, which must necessarily involve the dismemberment and intrusive restraint of deeply entrenched institutions, does that mean pain is the only way forward, "the worse the better" in the old revolutionary cliché? It need not mean that. But it does mean that palliative measures, like giving the banks money, would have to be attached to curative measures, like enacting capital requirements and imposing regulatory burdens that would force financial behemoths to break themselves up or become boring narrow banks. For almost two years, policymakers at the Fed and the Treasury, including Secretary Geithner, have offered bail-out after bail-out and asked for nothing serious in return.

Do I regret that Henry Paulson was not empowered to issue a blanket guarantee of bank assets early on, as the Swedes did? No, I don't regret that at all. Why not? Because I think that "Hank the Tank" was a crappy negotiator... He would have offered the financial system sugar without requiring it to make the medicine go down. He may believe, quite sincerely, that a cure would be worse than the disease. He may believe that, but he is wrong. ...

You may believe that we have learned our lesson, that if we can just get some stability and comfort for a while we are prepared to do what must be done. That's a respectable position. But I don't share it, and neither do the majority of Americans who are unwilling to allow their representatives to sign off on any more expensive aspirin. We want value for value, an ironclad commitment of root and branch reform in exchange for the unimaginable sums of money we are being asked to hand over. ... Congress would, because the public would, support large, explicit transfers, if they were attached to reforms sufficiently radical to prevent a recurrence, and suitably punitive towards the people who managed the system that brought us here. Value for value. ...

I ... would be willing to hold my nose and tolerate a Swedish-style guarantee of bank creditors. I'd acquiesce to that even without formal nationalization. Nationalization is ... a means to an end, and the desired end is a world in which too big to fail is too big to exist for any financial institution that originates or holds credit risk in any form. Secretary Geithner could send a bill to Congress today that would put all banks with a balance sheet of over $50B into run-off mode... I'd fax my Congressman and support a $2T on-budget buyout of bank creditors as part of that bill, as long as it had teeth. ("Teeth" would imply making sure that off-balance-sheet and derivative exposures were included in the size cap, etc.)

It's not that us pitchfork-totin' populists are unwilling to pay the bill. It's that we want to know that in exchange for writing a very, very large check, the people that we are paying will actually deliver the goods. Given the behavior of bankers before the crisis and of shifty policymakers during, we have every reason to watch warily and to insist upon every precaution while we hand over suitcase after suitcase of freshly printed Federal Reserve notes.

"Libertarian Dogma and the Fed"

Henry Kaufman:

How libertarian dogma led the Fed astray, by Henry Kaufman, Commentary, Financial Times: The Federal Reserve has been hobbled by ... major shortcomings that were primarily responsible for the current and several previous credit crises.

...My second major concern ... is the Fed's prevailing economic libertarianism. At the heart of this economic dogma is the belief that markets know best and that those who compete well will prosper, while those who do not will fail.

How did this affect the Fed's actions and behaviour? First, it explains to a large extent why the Fed did not strongly oppose the removal of Glass-Steagall restrictions. Second, it also helps explain why the Fed failed to recognise that abandoning Glass-Steagall created more institutions that were "too big to fail".

Third, it diminished the supervisory role of the Fed... [The] Fed's ... tilt toward an economic libertarian approach pushed supervision a notch down just at a time when financial market complexity was on the rise.

Fourth, as hands-on supervision slackened, quantitative risk modelling became increasingly acceptable. This approach ... was far from adequate. But it worked hand in glove with a philosophy that markets knew best.

Fifth, adherence to economic libertarianism inhibited the Fed from using the bully pulpit or moral suasion to constrain market excesses. It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective. ...

Sixth, the Fed's increasingly libertarian philosophy underpinned its view that it could not know how to recognise a credit bubble but knew what to do once a bubble burst. This is a philosophy plagued with fallacies. ...

By guiding monetary policy in a libertarian direction, the Fed played a central role in creating a financial environment defined by excessive credit growth and unrestrained profit seeking. ... At a minimum, the Fed's sensitivity to financial excesses must be improved.

links for 2009-04-28

David Davis, the 42 Day Terror Detention Plan, and the US Bullying the UK over Torture

At the Global Conference dinner tonight, part of which was a panel discussion on sports philanthropy by Andre Agassi, Mia Hamm, Tony Hawk, and Annika Sorenstam, I sat next to a conservative member of Parliament, David Davis. He told me this story:

Tories in turmoil as David Davis resigns over 42-day vote, UK Guardian, June 12, 2008: The shadow home secretary, David Davis, threw the Conservative leadership into turmoil today by unexpectedly announcing his resignation as an MP, forcing a byelection in his constituency over the government's 42-day terror detention plan.

Davis's move - to "take a stand" on what he said was the "relentless erosion" of freedoms by the government - was taken against the wishes of David Cameron, who beat him in a Tory leadership election in 2005.

Cameron made his disappointment clear by replacing Davis as shadow home secretary with the shadow attorney general, Dominic Grieve, and saying Davis had no guarantee of returning to the front bench if - as all parties expect - he wins the byelection. ...

Davis seemed unaware he had consigned himself to the backbenches, telling the BBC: "I may or may not be on the backbenches … This issue matters more to me than my job."

Labour attempted to undercut Davis by announcing that they, like the Liberal Democrats, would not contest the byelection... But Davis's decision to resign and stand again - a move last seen on the British mainland in 1982, and not since 1973 on a single issue of principle - injects new unpredictability into British politics. ...

A Conservative source said Davis had had only three hours' sleep on Tuesday night and was going through some kind of personal crisis. Davis brushed the suggestion aside, saying: "Pop psychology in politics is very amusing but rarely right."

In his resignation statement, delivered outside the Commons at 1pm, Davis said: "I will argue in this byelection against the slow strangulation of fundamental British freedoms by this government." He said the undermining of civil liberties through moves such as detention and the introduction of ID cards "cannot go on".

"It must be stopped, and for that reason today I feel it is incumbent on me to take a stand," he told reporters...

He said his current issue is torture:

Ministers face torture pressure, BBC: UK ministers must answer allegations that Britain was complicit in torture, a senior Conservative MP has said. David Davis said a High Court ruling on Wednesday alleged that Binyam Mohamed, a UK resident held in the Guantanamo Bay camp in Cuba, had been tortured. ...

The judges said the UK's attorney general has begun a criminal investigation into possible torture against Mr Mohamed. Lord Justice Thomas and Mr Justice Lloyd Jones said the attorney general would be investigating the issues of "torture and cruel, inhuman or degrading treatment".

The judges said they wanted the full details of the alleged torture to be published in the interests of safeguarding the rule of law, free speech and democratic accountability.

But they had been persuaded that it was not in the public interest to publish those details as the US government could then "inflict on the citizens of the United Kingdom a very considerable increase in the dangers they face at a time when a serious terrorist threat still pertains". ...

No 10 said it was not aware of any threat from the US government to withdraw intelligence co-operation with Britain if details of the case were revealed. ...

Mr Davis said a High Court ruling, which pointed to complicity by the UK and US authorities in his torture, was prevented from being published after the US put pressure on the UK. ...

He said Mr Miliband should make a statement to MPs about the issue as soon as possible to "explain what the devil is going on". He said the UK government should make it "plain" that it did not support torture in any circumstances.

Mr Mohamed, 30, has been held in Guantanamo for four years... But war crimes charges against him were dropped in October. ...

Last August, Lord Justice Thomas said evidence relating to the case should be disclosed, saying it was "essential". However, the British government argued the disclosure of certain material would cause "significant damage to national security".

Mr Davis said it appeared the Bush administration had "threatened" the UK government about the repercussions should details of the case be made public.

"Frankly it is none of their business what our courts do," he said, adding this was "plain fact" not merely an allegation.

"They should not seek in any circumstances to put pressure on British courts. That's completely beyond the rule of law."

He said Mr Miliband must explain why this had happened and whether the new Obama administration supported its predecessor's stance on the issue.

"While he is at it, he [the foreign secretary] should explain what degree of complicity we have in this," he told the BBC.

Mr Davis said the government had taken a "highly principled public stand" against torture but must "come clean" about whether there were cases where British agencies ever knew about instances of torture by others. ...

Civil liberties campaigners described the judges' remarks on the case as "astounding". Shami Chakrabarti, director of Liberty, said the Bush administration had tried "to bully" the British courts and President Obama must make it clear he would not do the same.

And Lib Dem leader Nick Clegg said all the documents in the case must be published immediately. "There is no other terms for what the US intelligence services are doing than blackmail," he said. "It is simply incredible that the US government would have halted intelligence co-operation with the UK if this information had been made public."

I encouraged him to pursue this, and the torture issue more generally, relentlessly.

Where are the US conservatives with this kind of courage? He said that when he first came out against the 42-day detention plan, the reaction on conservative blogs was very negative. However, the comments on those blogs disagreed overwhelmingly, and in no uncertain terms, and that grassroots support as he called it along with the support of a paper (the Daily something? - sorry - I don't recall) he compared to getting the support of Fox news caused the conservative blogs (and others in the media) to change their position. And once that happened, it was "checkmate" for those within the government who opposed him.

April 27, 2009

Economist's View - 5 new articles

Governor Schwarzenegger's Press Conference

Since I was issued a press pass for the conference, on a tip, I went to Governor Schwarzenegger's press conference on the swine flu outbreak. I was the only one taking pictures with an iPhone. For the most part, it was as expected, they are testing new flu cases, monitoring the borders in San Diego and Imperial counties (though he made it clear there are no travel restrictions, at least not yet - the Mexican border is a Federal issue in any case), and they gave hygiene tips (wash your hands!). There are currently seven cases in California, an eighth is suspected, and they are looking at a dozen additional cases. One of the doctors present noted that the CDC has created a seed virus and is ready to move forward to create a vaccine if needed (there are currently 5 million does of anti-viral medication out there - a combination of Tami flu and Relenza (sp?) - 25% will come to California, and they will be concentrated in the counties where there are outbreaks.


But the news, I thought, was when he was asked to react to advice being given in Europe not to travel to America, California in particular. Instead of saying that wasn't necessary, that it was alarmist, he said that each country has to do what it thinks is best. He did not say the advice was bad, and he made a statement about how we cannot worry about the economic effects right now. That made me think he believes the problem is far bigger than what is reported above (otherwise, the probability of infection is minuscule, and the European advice isn't really needed). Even so, I'd guess he wishes he'd given a different answer.

Update: Bloomberg's version:

Avoid Travel to Mexico, U.S. Says as Outbreak of Flu Advances, by Tom Randall, April 27 (Bloomberg): Nonessential travel to Mexico should be avoided because of the outbreak of swine flu there that may be responsible for killing 100 people and sickening 1,000, U.S. health officials said.

A similar recommendation made by European officials against travel to the U.S., where 40 cases have been confirmed, is "premature," said Richard Besser, acting head of the U.S. Centers for Disease Control and Prevention in Atlanta. None of the U.S. cases has been fatal, and the government is distributing swine flu information to people arriving in the U.S., he said.

Both the U.S. and European travel warnings may be influenced by politics more than science, said Margaret Chan, director-general of the World Health Organization in Geneva. WHO doesn't recommend closing borders or restricting the movement of people or goods, Chan told leaders from United Nations agencies in a conference call today. The disease, also confirmed in Canada and Spain, has spread too far and would be impossible to contain by closing borders, she said.

"By definition, pandemic influenza will move around the world," Chan said in the call today. "Does that mean we are going to close every country? Does that mean we are going to bring the world's economy to a standstill?

"We know from past experience that transmission of influenza or the spread of new influenza disease would not be stopped by closing borders and would not be stopped by restricting movement of people or goods." ...

Travel to Asia plunged during the 2002-2003 outbreak of severe acute respiratory disease, or SARS. ... "When we talk about travel advisories, we cannot think of the old days when we were dealing with SARS," Chan said today. "It's a totally different ballgame now." ...

Health authorities in the U.S. recommended that nonessential travel to Mexico be avoided. The European Union also advised travelers to avoid areas affected by the outbreak. Australia, Japan, Singapore and South Korea are among countries screening travelers for fever, while Hong Kong raised its swine- flu response level to "serious" from "alert."

When asked whether Europeans should avoid traveling to California, Arnold Schwarzenegger, the state's governor, said: "That's probably a wise decision."

He said the risk of decreased tourism is outweighed by the importance of preventing the spread of the virus. ...

Government is Always the Scapegoat

The first session at the Milken Institute Global Conference:

Financial Recovery: When and How?


Mohamed El-Erian, CEO and Co-Chief Investment Officer, Pacific Investment Management Co. (PIMCO)

Steve Forbes, Chairman and CEO, Forbes Inc.; Editor-in-Chief, Forbes

Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLC

John Micklethwait, Editor-in-Chief, The Economist


Michael Klowden, President and CEO, Milken Institute

The Global Conference kicks off by addressing the questions at the top of everyone's mind this year. Just where are we in the financial crisis? Is it the top of the eighth inning, or are we still stuck in the bottom of the third, with many more twists and turns still in store? Our panelists will attempt to quantify how much has been broken and how much has been repaired. What more needs to be done to promote a recovery? Are government efforts to restore normal lending and stabilize the banking system having any effect? What might be the effects of stimulus spending? Have we allocated too much — or too little — to address the problems? What indicators will signal that a recovery is under way?

I was curious to see how the attitudes had changed relative to last year, if they had changed at all, e.g. whether there would be any self-reflection, acceptance that the financial sector would have to change. But, nope, not from this panel anyway. There was a lot of talk and worry about the growing role of government in the economy, that was viewed as the main cause of all the problems in the past, and of problems yet to come. There was very little about the financial sector must change in order to stabilize the system going forward, very little about what needs to be done to clean up their own houses.

So the game so far this year, if one session is any indication, is to blame the government for the problems we have, and to point to the government as the biggest potential impediment to the recovery. I don't know if this is a conscious strategy or not, but it seems clear that blame the government is the defense against more regulation.

Forbes is a good example. He said unionization, the government takeover of banking and insurance, the stimulus program, regulation of the financial sector, and other government intervention will potentially stall the recovery. It was government that created this mess, he blames the Fed's low interest rates for the bubble (though later he blamed mark to market, fear of regulators causing assets to be undervalued, and the Fed allowing the dollar to fall too far, but the theme was always that government is the problem), and he says that if the government doesn't get out of the way, the recovery will be very slow. He had one main recommendation for ending the crisis: The Fed should aggressively buy MBS starting now. The fact that they haven't is the reason we are still having problems (so, it's the government's fault).

Griffin also blames government, even brings up the "how many people did we lift out of poverty defense" of financial innovation. But here's the argument that caught my attention. He says the the typical household does not understand all the ways it benefited from the financial sector over the last few decades. Thus, when we socialize losses, as we must do, we are merely taking some of those gains back - households are still better off overall. How is this the government's fault? Instead of explaining this to households so they'd understand, they have stoked populist anger, and that will lead to government reactions that will make things worse.

I shouldn't say that there was no attention at all to how the financial sector must change. In fact, one of the last questions asked was exactly that, "How must financial sector change?" Griffins answer was representative. He said that existing regulations are fine, but they weren't enforced. Thus, we need regulators to enforce what is there, not new regulation . In fact, he'd like some of the existing regulation to go away, and he cited California state law as an example. California has non-recourse laws, and he said this was a very large part of why we had the bubble. Without those laws, things aren't nearly so bad. He also blames Fannie and Freddie for the crisis, and says it proves regulation doesn't work.

The last question they were asked is "The one thing we should do to end the crisis faster." My notes on their responses:

El-Erian: Innovation got ahead of infrastructure. Don't kill the innovation, instead update the infrastructure. This was the closest anyone came to0 admitting that the financial sector must undergo change.

Forbes: The Fed should get more aggressive on MBS. Don't turn the US into Europe.

Griffin: Foster innovation by removing the government from picking winners and losers. The sooner we do that, the faster we'll recover.

Micklethwait: Sort out the good/bad banks as fast as possible, the fight for liberal, free market capitalism. Agrees with Griffin that government should explain how common person benefited from financial innovation so they'll feel better about helping to clean it up.

So there you have it, you don't know what's good for you. The financial sector is fine, so get out of the way, leave them alone, and let them make your lives better once again.

Needless to say, I see things a bit different. [I should edit this, but it will have to do as is ... off to the next session...]

Paul Krugman: Money for Nothing

Will bankers escape new regulation and get off with "nothing more than a few stern speeches"?:

Money for Nothing, by Paul Krugman, Commentary, NY Times: ...Sanford Weill, the former chairman of Citigroup,... insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after..., the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. ... All of which explains why we should be disturbed by an article ... reporting that pay at investment banks ... is soaring again — right back up to 2007 levels.

Why is this disturbing?... First, there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks. ...

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it's hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke ... in which he tried to defend financial innovation. His examples ... were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Still, you might argue that ... it's up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It's a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a "welfare." ...[G]iven all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn't just outrageous; it's dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we're seeing similar rewards offered to people who can play their risky games with federal backing. ...

Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren't plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They're making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it's eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There's a palpable sense in the financial press that the storm has passed: stocks are up, the economy's nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people's money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

links for 2009-04-27

"What's the Grand Old Party to Do?"

Here's one of the session's I plan to attend at this year's Milken Institute Global Conference:

What's the Grand Old Party to Do? The Future of the Conservative Movement


Andrew Breitbart, Publisher, and Big Hollywood; Columnist, Washington Times Jonah Goldberg, Columnist, The Los Angeles Times Amy Holmes, Political Analyst; former Senior Speechwriter for Senate Majority Leader Bill Frist Kathryn Lopez, Editor, National Review Online Byron York, Chief Political Correspondent, Washington Examiner


William Bennett, Former U.S. Secretary of Education; Author, America: The Last Best Hope

The Republican Party has suffered major losses in the last two elections. Democrats are now in control of Congress and the presidency. Polls show the GOP's popularity at near-record lows. And the recent spat over who is the leader of the party — Rush Limbaugh? — showed that Republicans have some work to do in order to restore the party's focus and popularity. In this panel, leading conservatives will offer their views on how to rebuild the GOP.

The rest of the sessions I'll attend are mostly economics and finance related, but this one caught my eye. I'll let you know how it goes.

April 26, 2009

Economist's View - 2 new articles

Luck and Taxes

Robert Frank:

Before Tea, Thank Your Lucky Stars, by Robert Frank, Commentary, NY Times: The link between success and luck is stronger than many people think. Analysis of this connection provides a useful framework for weighing ... recent "tea parties," where orators ... bemoaned their "crippling" tax burdens. ...

Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success..., some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands?...)

Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events. ...

Malcolm Gladwell reports that a disproportionate number of pro hockey players owe their success to the accident of having been born in January, which made them the oldest, most experienced players in every youth league growing up. For that reason alone, they were more likely to make all-star teams, receive special coaching and eventually become professionals.

Although people are often quick to ascribe their own success to skill and hard work, even those qualities entail heavy elements of luck. ... People born with good genes and raised in nurturing families can claim little moral credit for their talent and industriousness. They were just lucky. ...

Even in markets where luck plays no role, minuscule differences in performance often translate into enormous differences in salaries. ... In law, consulting, investment banking, corporate management and a host of other occupations, the ablest performers are often paid hundreds or even thousands of times as much as others who perform nearly as well.

Another important message of recent research is that a person's salary depends far more on where she is born than on her talent and effort.

For example, as a Peace Corps volunteer in Nepal long ago, I hired a cook who had no formal education but was spectacularly intelligent and resourceful. ... Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year. Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

The president's proposal is modest: raising the top marginal tax rate from 35 percent to 39.5 percent, its level when Bill Clinton left office and well below the corresponding level in most other industrial countries. There has never been a shortage of talented people willing to work hard for success... And the president's proposal would not cause such a shortage...

It would, however, promote more efficient provision of public services... For example,... when government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we're lucky enough to end up among life's biggest winners.

Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they'd hit a triple.

See also Hal Varian's Luck, Skill, and Progressive Taxes:

In the debate over tax policy, the power of luck shouldn't be overlooked, by Hal Varian, NY Times, 2001: President Bush's proposed tax cut has rekindled an age-old debate: how progressive or regressive should the income tax be? ...

Those who argue for a more progressive income tax emphasize equity: a tax dollar paid by a rich person causes less pain than a tax dollar paid by a poor person. Those who argue for a less progressive system emphasize efficiency: the most productive people should face lower tax rates to give them strong incentives to work harder and produce more.

These trade-offs have been examined in the economic literature... This formulation of the optimal income tax problem was first examined by the economist James Mirrlees... In the simplest version of the Mirrlees model, taxpayers differ only in their ability: how much they can produce with a given amount of effort. One striking result of this model is that those at the very top of the income scale should face low marginal rates.

This result emerges from a detailed mathematical analysis, but the intuition is not hard to explain. Let us assume, for the sake of argument, that Bill Gates made $1 billion in 2000, an amount larger than any other American taxpayer. Suppose further that despite the best efforts of his accountants, he ended up paying 40 cents of the last dollar he earned to the Internal Revenue Service.

Consider the following thought experiment: drop the marginal tax rate from 40 percent to zero for all incomes above a billion dollars. The I.R.S. won't lose any revenue from this reduction, since no one has an income larger than $1 billion. And who knows -- the lower marginal rate might encourage Mr. Gates to work a little harder in 2001, producing new products that would make him, and the rest of us, better off.

Of course, the fact that it pays to reduce the marginal tax rate for billionaires doesn't say much about what tax rates should be like for mere millionaires, a point that has been emphasized by Professor Mirrlees himself and confirmed by subsequent researchers, like Peter Diamond ... and Emmanuel Saez... But the intuitive argument presented above is pretty compelling: if income depends only on ability, those at the very top of the income-ability distribution should face low marginal tax rates.

But perhaps this model is too simple. One might well argue that Mr. Gates, as productive as he is, doesn't owe his success entirely to ability: there was a lot of luck involved, too. And, if truth be told, that's probably true even for mere millionaires.

So let's consider a different model: one in which differences in income are a result only of luck and have nothing to do with ability. In this case, the optimal income tax may well involve taxing billionaires at very high marginal rates. True, aspiring billionaires won't work quite as hard, since the after-tax reward from hitting $1 billion has been reduced. But the chances of becoming a billionaire are pretty low anyway, so taxing billionaires at a high rate won't really discourage much effort by those hoping to become one.

Thus a model where luck is the driving force tends to yield a more progressive optimal tax than a model where ability is the driving force. This is about as far as theory can take us, but it highlights the critical question: How much income results from ability and how much from luck?

It is safe to say that this question has not yet been completely resolved by the economics profession. Still, everyone seems to have an opinion about it: if you want to determine whether someone is a Republican or a Democrat, just ask that person whether differences in income come mostly from luck or from ability.

The preliminary evidence available from in-depth surveys like the Panel Study for Income Dynamics at the University of Michigan shows that income varies a lot from year to year for many households. Economists have found that random events like episodes of bad health, accidents, marital dissolutions and family emergencies play a large role in short-run year-to-year fluctuations in income.

A Harvard social policy professor, Christopher Jencks, and his collaborators pointed out many years ago that income inequality among brothers, who share similar genetic and environmental characteristics, is almost as great as for the population as a whole. This suggests that luck is an important factor in the long run as well.

If luck plays a substantial role in the determination of income, it makes sense to have a progressive income tax, creating a form of social insurance in which the lucky subsidize the unlucky. Perhaps the folk singer Phil Ochs had the best answer for why the upper half of the income distribution should pay so much more in taxes than the lower half: ''And there but for fortune, may go you or I.''

links for 2009-04-26

April 25, 2009

Economist's View - 3 new articles

"Washington Consensus a Thing of the Past Now"

Is the "Beijing Consensus" on the rise, even within the U.S.?:

'Washington Consensus' a thing of the past now, by Jonathan Holslag, Project Syndicate: ...[T]he "Washington Consensus" about how the global economy should be run is now a thing of the past. The question now is what is likely to replace it.

Although China is often said to lack "soft power", many of its ideas on economics and governance are coming into ascendance. Indeed, in pursuit of national economic stability, the Obama administration is clearly moving towards the kind of government intervention that China has been promoting over the past two decades.

In this model, the government, while continuing to benefit from the international market, retains ... strict control over the financial sector, restrictive government procurement policies, guidance for research and development in the energy sector, and selective curbs on imports of goods and services. All these factors are not only part of China's economic rescue package, but of Obama's stimulus plan as well. ...

Rather than obsessing about elections, the US now seeks to build pragmatic alliances to buttress its economic needs. This requires, first of all, cozying up with China and the Gulf states – the main lenders to the US Treasury – as well working with Iran and Russia to limit the costs of the wars in Afghanistan and Iraq.

As the US backtracks on its liberal standards, it is flirting with what can be called the "Beijing Consensus", which makes economic development a country's paramount goal and prescribes that states should actively steer growth in a way that suits national stability. What matters in this worldview is not the nature of any country's political system, but the extent to which it improves its people's wellbeing. ...

This ... realism is ... a reversal of the neo-conservative muscle-flexing of the George W Bush years. ... For example, in times of crisis it is no shame for a government to be mercantilist, but by behaving in this way, the US has lost the moral high ground as a champion of free trade. ...

As we move from a unipolar international order to one with multiple regional powers,... [t]he result will be a new concert of powers... Instead of entrusting America with the arduous task of safeguarding international stability on its own, the BRICs (Brazil, Russia, India, and China) will assume a more prominent role in policing their own backyards. Russia can have its Caucasus, and if the generals in Myanmar should go mad, it would become China's and India's problem to sort out. ...

Whether America is able to strengthen its global influence in the future will depend not so much on its moral esteem, but on the extent to which it succeeds in revamping its economy and forging new alliances. The same will apply for other powers.

But this rising Beijing Consensus offers no guarantee of stability. A concert of powers is only as strong as its weakest pillar, and requires a great deal of self-discipline and restraint. It remains to be seen how the American public will respond to its national U-turn.

If one main player slides back into economic turmoil, nationalism will reduce the scope for pragmatic bargaining. ... And, if China comes out of the crisis as the big winner and continues to boost its power, zero-sum thinking will soon replace win-win co-operation.

I don't agree with every word of this, but I have to hit the road in a few minutes and will have to leave the response to all of you.

"Good Government and Animal Spirits"

Akerlof and Shiller say it's up to government to set animal spirits free, only then will they be maximally creative":

Good Government and Animal Spirits, by George A, Akerlof and Robert J. Shiller, Commentary, WSJ: The principal long-term result of the current financial crisis should be improved financial regulation. ...

An understanding of animal spirits -- the human psychology and culture at the heart of economic activity -- confirms the need for restoring the role of regulators... History -- including recent history -- shows that without regulation, animal spirits will drive economic activity to extremes. ...

At the end of the 1980s, our economic system was remarkably well-adapted to weather any storm. For example, massive numbers of S&Ls failed during the decade. But government protections isolated this collapse into a microeconomic event that, while it cost taxpayers quite a bit of money, only rarely cost them their jobs.

Then the economy changed -- as it always does -- challenging the regulations that were in place. ... And regulation did not adapt to reflect this change in the financial structure. The regulatory failure led to a profound systemic instability in our economy...

Public antipathy toward regulation supplied the underlying reason for this failure. The U.S. was deep into a new view of capitalism. Americans believed in a no-holds-barred interpretation of the game. We had forgotten the hard-earned lesson of the 1930s: Capitalism can give us real prosperity, but it does so only on a playing field where the government sets the rules and acts as a referee.

Contrary to a widespread impression the current situation is not really a crisis of capitalism. Rather we must recognize that capitalism must live within certain rules. ... It may be true that in the classical economic paradigm there is full employment. But with animal spirits, waves of optimism and pessimism cause large-scale changes in aggregate demand... When demand goes down, unemployment rises. It is the role of the government to mute those changes.

Moreover, entrepreneurs and companies do not just sell people what they really want. They also sell people what they think they want, and not infrequently what they think they want turns out to be snake oil. Especially in financial markets... All of these processes are driven by stories. The stories that people tell to themselves -- about themselves, about how others behave, and even about how the economy as a whole behaves -- all influence what they do. These stories vary over time.

Such a world of animal spirits justifies the economic intervention of government. Its role is not to harness animal spirits but really to set them free, to allow them to be maximally creative. A brilliant player wants a referee, for only when the game has appropriate rules can he really show his talents. ...American financial regulation hasn't had an overhaul in 70 years. The challenge for the Obama administration, along with the U.S. Congress and our SROs, is to invent a new and better American version of the capitalist game.

links for 2009-04-25

April 24, 2009

Economist's View - 5 new articles

Fed Watch: TALF Disappointment and the Fed's Balance Sheet

Tim Duy says the Fed is likely to step up its purchases of long-term sucurities:

TALF Disappointment and the Fed's Balance Sheet, by Tim Duy: Mark Thoma directs us to a Washington Post article detailing the slow start-up of the Federal Reserve's much discussed but little used TALF program. At this juncture, a critical constraint appears to be counterparty risk - no one trusts the US government to hold parties to their contractual obligations:

Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. ... There are restrictions on the business activities of participants in the program. ... But perhaps more significant ... is a fear that the government could retroactively change the terms, exacting new limits on what investors can pay their executives, for example, or trying to claw back profits that firms make in the program. ...

Perhaps TALF will gain traction in the months ahead. For now, however, I imagine that no amount of lipstick is able to conceal what must be official disappointment with the program. The question on my mind is will slow take up on TALF induce the Federal Reserve to step up its purchases of mortgage assets and longer term Treasuries. From the last Fed minutes:

Members expressed a range of views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets. In contrast, the potential for a large increase over time in the size of the balance sheet from the TALF program was seen as supporting a more modest, though still substantial, increase in asset purchases.

It looks like the expected success of TALF was a reason for moderating the size of the balance sheet expansion via longer term assets. It would stand to reason, all else equal, that TALF's slow start would trigger the Fed to step up purchases of other assets.

Also, one would think the Fed would take note that expanding their purchases of longer term assets has been a relatively successful policy, especially if the goal was to pull mortgage and Treasury rates lower. To be sure, the ultimate impact on spending in the near term is likely to be muted - the benefits of lower mortgage rates are limited to households that are not credit impaired or underwater on their homes, and we are not likely to see much equity withdrawal this time around. But lower rates are triggering a wave of refinancings, which will lessen the cash drain of maintaining household balance sheets, and free up some additional spending power. Overall, however, the Fed will be wary that the benefits of their last policy expansion will wane if Treasury rates pull above 3%, and thus will be induced to expand purchases of those assets, trying to offset the impact of the massive supply issuing forth from Treasury.

It is interesting that a relatively simply policy - one that does not require and army of lawyers and financial managers - has been much more successful and quick to execute than the exceedingly complex TALF program. If policymakers were not so blinded by the fetish of finance, they would see this as an example of the time honored KISS principle.

Another policy change to be watching for - when will the Fed commit to a quantitative goal for a sustained rate of expansion in the balance sheet? From Federal Reserve Vice-Chair Donald Kohn:

In gauging the effects of market interventions in the current crisis, one approach is to look to the size of increases in the quantity of reserves and money to judge whether sufficient liquidity is being provided to forestall deflation and support a turnaround in growth--an approach often known as quantitative easing. The linkages between reserves and money and between either reserves or money and nominal spending are highly variable and not especially reliable under normal circumstances. And the relationships among these variables become even more tenuous when so many short-term interest rates are pinned near zero and monetary and some nonmonetary assets are near-perfect substitutes. In our approach to policy, the amount of reserves has been a result of our market interventions rather than a goal in itself. And, depending on the circumstances, declines in reserves may indicate that markets are improving, not that policy is effectively tightening or failing to lean against weaker demand. Still, we on the Federal Open Market Committee (FOMC) recognize that high levels of Federal Reserve assets and resulting reserves are likely to be essential to fostering recovery, and we have discussed whether some explicit objectives for growth in the size of our balance sheet or for the quantity of the monetary base or reserves would provide some assurance that policy is pointed in the right direction.

What conditions could force the Fed from "credit" easing to "quantitative" easing, the latter being explicit policy guides for monetary expansion? The Fed could seek to force a firmer lid on longer-term Treasury rates. Another is that the Fed believes that setting a quantitative target is necessary to keep inflation expectations anchored in the face of the deflationary potential of persistently wide output gaps. Alternatively, the Fed could choose to forgo quantitative targets as they evaluate the durability of the green shoots emerging from the economic wasteland.

Bottom line: The challenges of setting in motion the complex TALF program suggests that the Fed will step up purchases of longer term Treasuries. The next policy line to cross is the formation of explicit policy objectives for the growth of a monetary aggregate. I would be looking for language in Fedspeak that points in that direction.

Paul Krugman: Reclaiming America's Soul

We need to "regain our moral compass":

Reclaiming America's Soul, by Paul Krugman, Commentary, NY Times: "Nothing will be gained by spending our time and energy laying blame for the past." So declared President Obama, after his commendable decision to release the legal memos that his predecessor used to justify torture. Some people in the political and media establishments have echoed his position. We need to look forward, not backward, they say. No prosecutions, please; no investigations; we're just too busy.

And there are indeed immense challenges out there: an economic crisis, a health care crisis, an environmental crisis. Isn't revisiting the abuses of the last eight years, no matter how bad they were, a luxury we can't afford?

No, it isn't, because ... never before have our leaders so utterly betrayed everything our nation stands for. "This government does not torture people," declared former President Bush, but it did, and all the world knows it.

And the only way we can regain our moral compass ... is to investigate how that happened, and, if necessary, to prosecute those responsible.

What about the argument that investigating the Bush administration's abuses will impede efforts to deal with the crises of today? Even if that were true — even if truth and justice came at a high price — ...laws aren't supposed to be enforced only when convenient. But is there any real reason to believe that the nation would pay a high price for accountability? ...

Tim Geithner ... wouldn't be called away... Peter Orszag, the budget director, wouldn't be called away... Even the president needn't, and indeed shouldn't, be involved. All he would have to do is let the Justice Department do its job... America is capable of uncovering the truth and enforcing the law even while it goes about its other business.

Still, you might argue — and many do — that revisiting the abuses of the Bush years would undermine the political consensus the president needs to pursue his agenda.

But the answer to that is, what political consensus? There are still, alas, a significant number of people in our political life who stand on the side of the torturers. But these are the same people who have been relentless in their efforts to block President Obama... The president cannot lose their good will, because they never offered any.

That said, there are a lot of people in Washington who ... probably just don't want an ugly scene... But the ugliness is already there, and pretending it isn't won't make it go away.

Others, I suspect, would rather not revisit those years because they don't want to be reminded of their own sins of omission.

For the fact is that officials in the Bush administration instituted torture as a policy, misled the nation into a war they wanted to fight and, probably, tortured people in the attempt to extract "confessions" that would justify that war. And during the march to war, most of the political and media establishment looked the other way.

It's hard, then, not to be cynical when some of the people who should have spoken out against what was happening, but didn't, now declare that we should forget the whole era — for the sake of the country, of course.

Sorry, but what we really should do for the sake of the country is have investigations both of torture and of the march to war. These investigations should, where appropriate, be followed by prosecutions — not out of vindictiveness, but because this is a nation of laws.

We need to do this for the sake of our future. For this isn't about looking backward, it's about looking forward — because it's about reclaiming America's soul.

I wrote this several days ago, but never posted it. It echoes much of the above:

When asked whether people will be held accountable for their actions during the time the last administration was in power, this administration says that it's time to move on, to put the past behind us, to let bygones be bygones. But that is not a reason to prevent people from having to take responsibility for their actions.

So I am not convinced. If the country were to fall apart should the rule of law prevail, then perhaps the calculation changes. Is that what would happen? Will the country fall apart if the guilty are pursued? No, it won't, we'll be better for it. Will it make it harder to form a coalition with people on the right in order to get other things such as health care reform done? Yes, it probably will, but so what? Bringing people to justice is always inconvenient and costly, there are almost always externalities, but we bring people to trial anyway.

What will happen that's so bad, other than the president will have a much tougher time with the opposition? If that's all it is, that's no reason to stop the pursuit of justice. Sure, you can argue that more people will be hurt if we fail to pass health care than will be helped by prosecuting, some argument like that, but that's not how we make these decisions. If a factory owner commits a crime, and sending that owner to jail will cost the town many, many jobs and create hardship, do we say, that's okay, you have us over a barrel, so go ahead and do whatever you want? If the entire nation is seriously at risk, then, sure, intervene, but that's not the case.

What about the argument that it would harm the CIA? If we are afraid people who will do these things won't want to work there, so what? In any case, start with the people in charge, those at the highest levels who made the decisions, and work down from there. We can figure out where the line is. If people knew, reasonably, that they were breaking the law, then hold them accountable. Some were relying upon shaky legal foundations (shaky gives it more credit that it deserves since it implies it was standing at all, however unsteadily), and that makes it harder, but not impossible.

And why is up to one person anyway? I thought we had a legal process, not a king. The power of the pardon is available, of course, but shouldn't we find out what happened and establish guilt before we start handing out the pardons? The truth matters too.

Furthermore, the president is not an unbiased, impartial observer here. If people are pursued for their crimes and he doesn't stop it, he can well imagine acts of retaliation later, where people attempt to try him or members of his administration for violating laws. But that's not a reason for him to intervene and stop prosecutions, the conflict of interest is a reason to step aside. If there's a flaw in the system that allows frivolous attempts to prosecute the president or his close associates, then fix it, but don't let it stop people from being held accountable for their choices. Again, if the nation comes under threat from the pursuit of justice, that's a different matter, but that case has yet to be made.

There are probably constitutional and legal principles I'm unaware of that are at play here, but this stinks. The rule of law applies to everyone, not just when it's convenient.

"The Recovery to Come"

Jamie Galbraith explains why he believes the recovery will be slow, and what we might do to speed it up:

The Recovery to Come, Remarks to the 18th Annual Conference Honoring Hyman Minsky, by James K. Galbraith: ...The question before us is:... Will what went down, come back up? ... It seems to me that there are four essential points to make about the expansion to come.

- It will surely be very slow to restore employment. At present writing jobs are being lost at the rate of over 600,000 per month. To reverse this in six months would require a swing to job creation of the same amount, or a net swing of 1.2 million jobs a month for half a year. This is not going to happen - not even close. ... As a result, we can expect the human wreckage of this slump to persist... Without direct employment measures, many of the people most hurt will not again find decent jobs.

- As a result of the administration's determination to save the big banks, we will emerge from this slump with an unreformed financial sector in the hands of the same people who produced the disaster in the first place. ...

- In the expansion the early easy buck, especially for speculators, may well be in commodities, especially oil. A rapid increase in imported energy costs would reverse the effective stimulus now being given by low oil prices. It will also generate CPI inflation, perhaps inducing the Federal Reserve to slam on the brakes. There is little reason to hope that the recovery will be allowed to march us all the way back to full employment unless we overcome our vulnerability to volatile oil prices, and nothing in the plans so far suggests we have...

- A turnaround could bring the deficit hawks back out of the woodwork, arguing vociferously that "now is the time" for tax increases and entitlement cuts. Should they prevail, the process could be thrown into reverse, in a recapitulation of Roosevelt's balance-the-budget recession of 1937-38.

The British used to call this scenario "stop-and-go." A future of short and incomplete expansions may be the most likely case, with no prospect for a return to full employment. For the working population of the country, this is no recovery at all. And it will be made all the worse rising financial markets and premature declarations of victory, the gloating of the bailed-out. ...

Let me close by laying out four steps that would help to avert this future, and help to assure a long and relatively stable expansion, leading ultimately back to high employment.

- Treasury should change its bank plan, recognize that too-big-to-fail is also too-big-to- regulate, and too-big-to-regulate is also too-big-to-manage. ... That choice is between preserving vast rogue companies whose major functions are tax and regulatory arbitrage, or allowing the smaller banks that have largely played by the rules to grow into the legitimate market niches the big players may vacate. Apart from the vast political power of the big banks, this is not a difficult choice.

- The unmet human disaster of this slump remains urgent, and the way to meet it is to strengthen, not weaken, the social safety net. ...

- For the long term, we should build institutions now, including a National Infrastructure Fund and a cabinet Department for Energy and Climate, capable of planning and funding the reconstruction of the country. The point of this is to build expectations for a sustained expansion and also to give it a direction, charting the course that private investments will follow when they eventually return.

- Finally, we should recognize that we are fortunate in this country to have the governing institutions established for us in the New Deal and Great Society, including a central bank with unlimited lending powers, a national government that can borrow and spend at will, and the global reserve currency. These institutions have -- despite flaws and mistakes -- served us well. But we should recognize that the rest of the world is not so favored. In particular, Europe lacks the mechanisms and the inclination to take action as we can...

It is therefore quite possible that the rest of the world will not cooperate in economic recovery even if one gets started here. It is possible that credit, debt and exchange-rate crises still to come will overwhelm the capacity of the global system to cope. We should be prepared, if we can, to deal with that risk.

Blogginheads: Economics 2.0

The economy as a broken spaceship (08:02) Are macroeconomic models just hogwash? (14:10) Resizing and recasting the financial sector (30:46) Did we have to bail out the banks? (37:35) Why statistics can't predict economic future (yet) (41:16) Czar for a day: Mark and Arnold fix the economy (47:32) Play entire video (56:51)

links for 2009-04-24