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March 30, 2010

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Latest Posts from Economist's View


Is a Frugal Policy the Better Solution?

Posted: 30 Mar 2010 12:51 AM PDT

Jeff Sachs is more hawkish than I would have guessed:

A frugal policy is the better solution, by George Osborne and Jeffrey Sachs, Commentary, Financial Times: Virtually all policy analysts agree that the path to renewed prosperity in Europe and the US depends on a credible plan to re-establish sound public finances. Without such a plan, the travails which have hit Greece ... will soon enough threaten the UK, US, and other deficit-ridden countries. In the recent duel of macro-economists, one camp has called for early budget consolidation... We agree. Others want more fiscal stimulus, delaying deficit reduction. We believe delaying the start of deficit reduction would put long-term recovery at risk. Such an approach misjudges politics, financial markets, and underlying economic realities.
Blaming our predicament on financial markets, as some in the second camp do, ignores the awkward truth that governments have enabled, if not enthusiastically promoted, recklessness, through chronic deficits and lax financial regulation. Our predicament, in this sense, is a political crisis at least as much as a financial one. We can't expect "credibility" by succumbing to temptation just one more time. ...
Self-described Keynesians, including Paul Krugman, and Lords Layard and Skidelsky, see the financial markets as benignly ready to finance budget deficits, pointing to low market interest rates. By contrast, we believe financial markets are perfectly capable of getting spooked about the prospects of debt financing in the medium term. ...
The general notion that delay is beneficial in the short term because it provokes more spending today – irrespective of future debt burdens – is also wrong... If the starting position is a large structural deficit, further fiscal "stimulus" can darken consumer and business confidence by creating fears about future debt burdens. These fears may be translated directly into higher borrowing costs today for government and the private economy. ...
Sustainable recovery is a medium- and long-term project: investing in the next generation of technologies, workers, and families. Those who are hurt between the collapse of the recent bubble and the start of a new growth era must of course be protected. But it is naive to believe that governments can create high-quality, high-productivity jobs that last by inflating bubbles or digging ditches.
Government and the private sector will be complementary forces in a real, sustained, job-creating recovery. The new jobs must be largely in the private sector. But the public sector has a critical role in ensuring that the conditions for sustainable growth are in place. These include the regulation of and finance for modern infrastructure, high-quality education, pre-commercial innovation, and a world-class science and technology base. ...
Our priority should be a medium-term fiscal framework, with the first steps starting this year. That must be matched by improvements in the delivery of health, education, skills, and technology; social protection for those in need; and a decent regard for the long-term investments needed to rebuild an economy crushed by the bubbles of wishful thinking.

The economy is not yet ready for an increase in taxes or a cut in spending. Cutting the deficit too soon could undermine the recovery and send the economy back into recession. We'll get there soon enough, but we're not there yet.

Their solution might be "sustainable" if we had the social programs in place to automatically protect those "who are hurt between the collapse of the recent bubble and the start of a new growth era." But we don't, and we aren't going to get them anytime soon, so the protection must come from sustained government intervention.

How long should the help be sustained? With labor markets in such poor shape, it's too soon for government stimulus programs to be scaled back. If anything, more help is needed. Once labor markets are healthy, we can and should begin to wind down the stimulus effort and begin to address long-run deficit issues, but, again, we're not there yet.

Disinflation Continues...

Posted: 30 Mar 2010 12:51 AM PDT

Despite all the worries about inflation, the latest release of the Dallas Fed's Trimmed mean PCE inflation calculations (a measure of the core rate of inflation) indicates that inflation is still headed downward:

Trimmed
[click to enlarge]

"The trimmed mean PCE inflation rate is an alternative measure of core inflation in the price index for Personal Consumption Expenditures"

Here are the recent data for the 12-month inflation rate (3/29 release):

  12-month
Mar-09 2.26
Apr-09 2.24
May-09 2.08
Jun-09 1.94
Jul-09 1.66
Aug-09 1.60
Sep-09 1.45
Oct-09 1.51
Nov-09 1.40
Dec-09 1.37
Jan-10 1.18
Feb-10 1.04

links for 2010-03-29

Posted: 29 Mar 2010 11:04 PM PDT

"Immigration and the Welfare State"

Posted: 29 Mar 2010 03:33 PM PDT

Jeff Miron says "we should liberalize immigration because it will restrain the welfare state":

Immigration and the Welfare State, by Jeffrey Miron: Jason Riley has a nice column in today's WSJ about the interaction between welfare and immigration policies. He correctly notes that immigrants to the U.S. do not come mainly for the welfare benefits, but he worries this could change as welfare policies, like Obamacare, expand.

I share Riley's opposition to Obamacare, as well as his support for legal immigration. My one disagreement is his endorsement of the Friedman view on the relation between the welfare state and immigration:

In countries such as France, Italy and the Netherlands, excessively generous public benefits have lured poor migrants who tend to be heavy users of welfare and less likely than natives to join the work force. Milton Friedman famously remarked, "you can't have free immigration and a welfare state." There is a tipping point, even if the U.S. has yet to reach it.

Riley and Friedman may be right, but my hunch is that they have the sequencing backwards: we should liberalize immigration because it will restrain the welfare state. The European examples that Riley cites might seem to argue against this view, but these countries still restrict immigration significantly. My claim is that major expansions in legal immigration would cause substantially diminished support for generous welfare spending.

On the run, so I'll have to let you take this on in comments...

"Taking Hope in the Long View"

Posted: 29 Mar 2010 10:23 AM PDT

De long view:

Taking Hope in the Long View, by J. Bradford DeLong, Commentary, Project Syndicate: In the United States, we sit in the midst of 10% unemployment. In some countries, fiscal policy is crippled by legitimate fears that more deficit spending will trigger government-debt crises. In many other countries, fiscal policy is crippled by confusion between short-term cyclical and long-term structural deficits.

Meanwhile, banking policy is crippled by populist reaction against more bailouts, and monetary policy by a strange mindset among central bankers that fears inflation even as wage growth continues to drop. ...

It is time to calm down. And the best way to calm down is by taking the long view.
If all goes well in China and India in the next generation – and if nothing goes catastrophically wrong in the rich, post-industrial, North Atlantic core of the global economy – the next generation will reach a real milestone. For the first time, more than half of the world will have enough food not to be hungry, enough shelter not to be wet, enough clothing not to be cold, and enough medical care not to be worried that they and most of their children will die prematurely of micro-parasites.
The big problems for most of humanity will be to find enough conceptual puzzles and diversions in their work and leisure lives to avoid being bored, and enough relative status not to be green with envy of their fellows. And, of course, they will have to dispose of thugs who used to have spears but will now have cruise missiles and H-bombs...
How did this miracle come about?
Some say that it was ... the shift from a worldview that relied on prayer and the propitiation of spirits to one that relied on rational manipulation and management of nature and of society. But the Classical Greeks had natural philosophy, and the Classical Romans believed in figuring out what worked and applying it. Yet all they produced were some splendid works of architecture and infrastructure and a system of military training that spread their society beyond the Mediterranean.
Some say that the miracle stemmed from an agricultural revolution... But eleventh-century China had a bigger and earlier agricultural revolution than eighteenth-century Britain, and China would have to wait another millennium before emerging as a global power.
Some say that the European conquest of the Americas deserves the credit. But what was shipped back from America across the Atlantic to Europe ... was never real wealth. It was merely sterile gold and silver, some empty calories (in the form of sugar), and some psychoactive products –coffee, tea, chocolate, and tobacco.
Some say that it was the commercial revolution and the rise of the middle class that brought us to the brink of victory over scarcity. But Adam Smith in 1776, and David Ricardo a little later, looked forward to a future Britain that looked a lot like China – a full country with high agricultural productivity and a well-developed division of labor but a very poor peasantry and working class ruled by very rich landlords.
Or maybe it was the industrial revolution of the eighteenth century... But, as late as 1871, John Stuart Mill was writing that it was doubtful whether all of the industrial revolution's inventions had lightened the day's toil of a single worker.
Looking back, it is difficult to avoid the conclusion that it was at the end of the nineteenth century that something really special happened. That really special thing had three parts.
First, the advent of global communications meant that ideas invented or found or applied in one part of the world could be quickly made known to and adapted in other parts of the world, rather than waiting decades or centuries to percolate across the oceans.
Second, the coming of global transportation meant that any good idea could be put into practice to produce enormous profits as it was leveraged across the entire globe.
Third – and in large part a consequence of the other two – the rise of the professional inventor and the industrial research laboratory created a class of people whose business was not to make and apply a single invention, but to invent the process of continuous and constant invention and innovation itself.
Because all three of these developments occurred at roughly the same time, we had our critical mass and the chain reaction that has brought us here. Let's hope that we can keep it in motion, and that we don't spoil it by losing sight of what was really important in bringing it about.

When nearly 10% of the people are unemployed and government is looking the other way hoping it will somehow fix itself, I have no intention of calming down no matter how rosy the long view might be. It's nice that all these wonderful things are happening, and I also hope they will continue, or even accelerate, but that doesn't change the immediate needs one bit.

Calm down while people are struggling to make ends meet? I don't think so.

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