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May 16, 2010

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Latest Posts from Economist's View


Shiller: Fear of a Double Dip Could Cause One

Posted: 16 May 2010 12:27 AM PDT

If you believe the price of a good you consume regularly is going to go up in the future, the best thing to do is to stock up now. If everyone else shares that belief, that will drive the price up, just as you thought. Thus, even if the expectation of an increase in the price was driven by nothing more than speculation and rumor, the expected change in the price will be self-fulfilling. Beliefs about the future will be validated by observable events, and this will tend to reinforce the beliefs (this is one way a bubble could get started, but the point here is simply that expectations can be self-fulfilling).

Robert Shiller says there is a growing belief that the economy will have a double-dip recession, and that this belief may cause the outcome people are worried about:

Fear of a Double Dip Could Cause One, by By Robert J. Shiller, Commentary, NY Times: The risk of a double-dip recession hasn't abated..., the danger stems from the weakness and vulnerability of confidence — whose decline could bring markets down, further stress balance sheets and cause cuts in consumption, investment and local government expenditures.
Ultimately, the risk resides largely in social psychology. It is the fear of fear itself, of which Franklin D. Roosevelt famously spoke.
From 2007 to 2009, there was widespread concern about the risk of an economic depression, but that scare has been abating. Since mid-2009, it has been replaced by the milder worry of a double-dip recession... And with that depression scare still fresh in our minds, sensitivity to the possibility of another downturn remains high.
To be sure, many economists doubt that a double-dip recession is in store. ... And there have been encouraging factors... But forecasters ... may be missing the real worry that many people harbor about the economy.
I use a definition of a double-dip recession that doesn't emphasize the short term. Instead, I see it as ... a recession in which unemployment rises to a high level and then falls at a disappointingly slow rate. Before employment returns to normal, there is a second recession. As long as economic recovery isn't complete, that's a double-dip recession, even if there are years between the declines.
Under that definition, there has been only one serious double-dip recession in the last century — and it was serious indeed. It started with the 1929-33 recession, which was followed by a recession in 1937-38. Between those declines, the unemployment rate never moved below 12.2 percent. Those two recessions, four years apart, are now typically lumped together as one event, the Great Depression.
Many negative factors persisted between those dips. High among them was a widespread sense then that something was amiss with the economy. There was a feeling of uncertainty that discouraged entrepreneurship, lending and spending, and most important, hiring.
We have to deal with a similar — though less extreme — problem today. Many of us are unsettled by images that are preventing a return to normal confidence — images of rioting in Athens, or of baffled American traders during the nearly 10 percent drop in the stock market on May 6. And if the BP oil spill ... eventually wreaks havoc on the gulf economy, we may need to add it to the list, too. ...
Fostered by mass psychology,... aftershocks could occur in the next year or two. This ...  could be ... severe. ... We need to look at short-run events, like the market reaction to the Greek bailout, as no more than side effects. Slowly moving changes in our animal spirits represent the real risk of a double-dip recession.
I think the more likely trigger is further economic trouble. We could be hit by big shocks that we are vaguely aware might be a problem but do not yet fully anticipate, or it could be something else unexpected -- another big oil shock for political or other reasons would be hard for the recovering economy to absorb. Even more likely is an outbreak of extreme hawkishness causing us to pull back too fast on fiscal stimulus, and to raise interest rates too fast. That is, I think it's more likely that economic events will drive fear rather than the other way around. That's not to say that fear doesn't provide an important negative feedback mechanism, I think it does, but I'm not convinced that psychology is the prime causal mover.

links for 2010-05-15

Posted: 15 May 2010 11:01 PM PDT

Elena Kagan's Undergraduate Thesis

Posted: 15 May 2010 09:15 PM PDT

Via Brad DeLong, Elena Kagan's Undergraduate Thesis:

From the introduction:

Ever since Werner Sombart first posed the question in 1905, countless historians have tried to explain why there is no socialism in America. For the most part, this work has focused on external factors--on features of American society rather than of American socialist movements. Socialists and non-socialists alike have discussed the importance of the frontier... the fluidity of class lines... the American labor force's peculiarly heterogeneous character, which made concerted class action more difficult than it might otherwise have been. In short, most historians have looked everywhere but to the American socialist movement itself for explanations of U.S. socialism's failure. Such external explanations are not unimportant but neither do they tell the full story. They ignore or overlook one supremely important fact: Socialism has indeed existed in the United States.... The Socialist Party increased its membership from a scanty 10,000 in 1902 to a respectable 109,000 in the early months of 1919... a party press that included over three hundred publications with an aggregate circulation of approximately two million....

The success of the socialists in establishing a viable--if minor--political party in the early twentieth century suggests that historians must examine not only external but also internal factors if they hope to explain the absence of socialism from contemporary American politics. The effects of the frontier, of class mobility, of an ethnically divided working class may explicate why the Socialist Party did not gain an immediate mass following; they cannot explain why the growing and confident American socialist movement collapsed....

We are, then, left with three ultimately inadequate explanations of the sudden demise of a growing socialist movement. The otherworldliness of the socialists, the expulsion of Haywood in 1912, the Russian Revolution of 1917--none will satisfactorily explain the death of social- ism in America. What, then, was responsible? In attempting to answer this question, this thesis will focus almost exclusively on the history of the New York City local of the Socialist Party....

The collapse of New York socialism, although sudden, had deep roots indeed. From its first days, the New York SF was both divided within itself and estranged from many of its trade-union followers. Among the party's members, a right-left cleavage arose early--a cleavage based not on the minutiae of dogma but on the very fundamentals of socialism itself. What was the proper class composition of a socialist party? What trade-union and electoral policies should the party follow? What attitude should the party take toward distinctly non-radical reform measures?... At the end of 1918, old disputes quickly reappeared, but this time in even fiercer form. For years, large numbers of the SP's members and large blocs of its trade-union support had expressed deep dissatisfaction with socialist leadership. Now, the Russian Revolution set the spark... and the Socialist Party burst into flames. In 1919, the SP split into two.... Intra-party sectarianism had previously weakened the socialist movement; inter-party sectarianism now finished the job...

And from the conclusion:

In our own times, a coherent socialist movement is nowhere to be found in the United States. Americans are more likely to speak of a golden past than of a golden future, of capitalism's glories rather than of socialisms greatness. Conformity overrides dissent; the desire to conserve has overwhelmed the urge to alter. Such a state of affairs cries out for explanation. Why, in a society by no means perfect, has a radical party never attained the status of a major political force? Why, in particular did the socialist movement never become an alternative to the nation's established parties?

In answering this question, historians have often called attention to various charcteristics of American society... an ethnically-divided working class, a relatively fluid class structure, an economy which allowed at least some workers to enjoy what Sombart termed "reefs of roast beef and apple pie"--prevented the early twentieth century socialists from attracting an immediate mass following. Such conditions did not, however, completely checkmate American socialism.... Yet in the years after World War I, this expanding and confident movement almost entirely collapsed.... [T]he experience of New York.... From the New York socialist movement's birth, sectarianism and dissension ate away at its core. Substantial numbers of SP members expressed deep and abiding dissatisfaction with the brand of reform socialism advocated by the party's leadership. To these left-wingers, constructive socialism seemed to stress insignificant reforms at the expense of ultimate goals. How, these revolutionaries angrily demanded, could the SP hope to attract workers if it did not distinguish itself from the many progressive parties, if it did not proffer an enduring and radiant ideal? How, the constructivists angrily replied, could the SP hope to attract workers if it did not promise them immediate benefits, if it did not concern itself with their present burdens?...

Through its own internal feuding, then, the SP exhausted itself. forever.... The story is a sad but also a chastening one for those who, more than half a century after socialism's decline, still wish to change America. Radicals have often succumbed to the devastating bane of sectarianism; it is easier, after all, to fight one's fellows than it is to battle an entrenched and powerful foe. Yet if 'the history of Local New York shows anything, it is that American radicals cannot afford to become their own worst enemies. In unity lies their only hope. ---- Download Elena-kagan-thesis

via delong.typepad.com

Eichengreen: Europe’s Historic Gamble

Posted: 15 May 2010 12:58 PM PDT

Barry Eichengreen on the euro:

Europe's Historic Gamble, by Barry Eichengreen, Commentary, Project Syndicate: The last few weeks have been the most amazing – and important – period of the euro's 11-year existence. First came the Greek crisis, followed by the Greek bailout. When the crisis spread to Portugal and Spain, there was the $1 trillion rescue. Finally, there were unprecedented purchases of Spanish, Portuguese, Greek, and Irish bonds by the European Central Bank. All of this was unimaginable a month ago.
Europe's fortnight mirabilis was also marked by amazing – and erroneous – predictions. Greece would be booted out of the monetary union. The eurozone would be divided into a Northern European union and a Southern European union. Or the euro – and even the European Union – would disintegrate as Germany turned its back on the project.
But, rather than folding their cards, European leaders doubled down. They understand that their gamble will be immensely costly if it proves wrong. They understand that their political careers now ride on their massive bet. But they also understand that they already have too many chips in the pot to fold....[continue reading]...

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