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June 7, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View


Fed Watch: A Good Crisis, Wasted

Posted: 07 Jun 2010 12:24 AM PDT

Tim Duy is discouraged that policymakers have failed to use the crisis as an opportunity "to bring some sanity to the global financial architecture":

A Good Crisis, Wasted, by Tim Duy: It is official. The rest of the world assumes the economy can pick up were we left off in 2006, with the US as the driver of global demand. And it is apparent there is little US policymakers can or will do to counter the trend. Once again, crisis - and along with it the opportunity to rebalance global growth - is wasted.

The Greek debt crisis gave Europe's deficit hawks just the excuse they have needed to pull back on fiscal stimulus. From Bloomberg:

Chancellor Angela Merkel said Germany is poised for a "decisive" round of budget cuts that will shape government policy for years to come, fueling disagreement with U.S. officials who favor measures to step up growth.

Speaking at the start of two days of Cabinet talks in Berlin called to identify potential savings of 10 billion euros ($12 billion) a year, Merkel said Europe's debt crisis underscores the need for budget tightening to ensure the euro's stability.

German Chancellor Angela Merkel has a cheerleader at the ECB:

European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand.

The impact of narrower budget gaps "on growth could not be considered negative because it would improve confidence," Trichet told reporters yesterday after meeting with Group of 20 finance chiefs in Busan, South Korea. The need for such action is clear in "old industrialized economies," he said.

In the eyes of Trichet, the tragedy of the Greek crisis was that the ECB was pulled into the fray, forced to buy sovereign debt in a move that threatened the independence of Europe's central bank. Obviously, one way to prevent a repeat of this supposed travesty is simply to ensure that all EMU parties bring spending under control. Whether they really need to or not - no reason to go through that messy business of trying to differentiate between nations.

Elsewhere in the Euro zone, some are quite pleased to let the Euro sink:

"I see good news from the current euro-dollar rate," French Prime Minister Francois Fillon told reporters in Paris June 4. President Nicolas Sarkozy "and I have been saying for years that the euro-dollar rate didn't reflect reality and was penalizing our exports," he said.

And the Chinese remain hesitant to change policy, so perhaps Europeans are wise to just throw in the towel:

"Something has to be done on the currency," Strauss-Kahn told reporters in Busan. "The IMF still believes that the renminbi is substantially undervalued," he said, using another term for China's currency.

Perhaps it is naïve to believe Chinese policymakers would let the renminbi rise given their inability to manage their domestic economy. From the Wall Street Journal:

Government policy changes have thrown China's booming property market into a period of paralysis that some industry executives say will last for several months, weighing on global growth prospects already battered by the turmoil in Europe.

A rebound in China's property market has been central to the nation's rapid recovery from the financial crisis, but surging housing prices had led to increasingly open discontent from middle-class families in major cities. After months of indecision, Beijing in mid-April announced a package of policies intended to blow the froth out of the market by restricting speculative purchases.

Officials may have gotten more than they bargained for. Though still too recent for their effect to show up in official economic statistics, early indications are that the new measures have sharply cooled the property market. Arriving around the same time as the debt crisis in Greece, China's new restrictions caused many investors and businesses to question the strength of the global recovery. Domestic steel prices are down 7.4% since the April measures, and as of Thursday China's main stock market index is down 19.4%.

Chinese policymakers are not willing to upset the export cart at the same time they are dealing with start-stop internal issues. Where this all ends for the US is painfully obvious. US Treasury Secretary Timothy Geithner wrote in an open letter to the G20 finance ministers:

...achieving a strong and sustainable global recovery requires that we make further progress on rebalancing global demand. Given the broader shifts underway in the U.S. economy toward higher domestic savings, without further progress on rebalancing global demand, global growth rates will fall short of potential. In this context, we are concerned by the projected weakness in domestic demand in Europe and Japan. In keeping with the Pittsburgh Framework on Strong, Sustainable, and Balanced Growth, the necessary shift toward higher savings in the United States needs to be complemented by stronger domestic demand growth in Japan and in the European surplus countries, and sustained growth in private demand, together with a more flexible exchange rate policy, in China.

Don Geithner, tilting at windmills. His battles are futile. Financial markets know it, sensing that the global growth cannot be sustained on the back of the US alone. Of course, this was always the case; demand in the US alone was never sufficient to recreate the fabled "V" recovery of the 1980s. Market participants also know that US policymakers have their finger in the dam of a tidal wave of competitive devaluations. The Dollar, for all its warts, remains the big dog of reserve currencies, and Geithner fears the global pandemonium that would result from an actual US response to the currency manipulation of others. Thus the postponed report on currency manipulators becomes another case of "extend and pretend."

In the end, why continue to hold the Euro on what is increasingly the myth of global rebalancing? It is clear European policymakers want a weaker Euro, and US policymakers are powerless to prevent a stronger dollar. At least we are getting cheaper oil as a result.

When it all shakes out, the US will actually be asked to do more, not less. Lower interest rates will discourage saving and diffuse a political barrier to enhance fiscal stimulus in the US. Goodness, as I write this, the yield on the 10 year is again below 3.20%. Clearly, the world is looking for more, not less AAA debt, and the US will eventually be the last nation willing to issue it. Moreover, eventually the persistent unemployment problem will weigh on politicians such that while they might bluster on about deficit spending, they will forced to do just that. Meanwhile, the Federal Reserve claims to be prodding banks to lend more aggressively. From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke said he's concerned about the costs U.S. joblessness is imposing on the economy and that the central bank is telling field examiners to encourage lending to creditworthy businesses.

"One particularly difficult issue is the continued high rate of unemployment," Bernanke said today at a forum at the Chicago Fed's Detroit office, calling joblessness among the "important concerns" for the recovery. "High unemployment imposes heavy costs on workers and their families, as well as on our society as a whole."

Again, the jobs problem. A problem that will magically receive more attention as Wall Street flails. After all, an unemployed high school dropout won't be writing checks for $10,000 a plate campaign fundraisers, not like that nice man from the hedge fund.

Where does this all leave us? The rest of the world is intent on pursuing a begger thy neighbor strategy, with the US being the neighbor. I suspect US policymakers will eventually relent; it will be the only choice left. All we can do now is sit back and wait for the inevitable explosion in the US trade deficit, waiting idly by for the next crisis and the "chance" to bring some sanity to the global financial architecture.

Surowiecki: The Regulation Crisis

Posted: 07 Jun 2010 12:06 AM PDT

James Surowiecki argues, correctly I think, that one of the key factors in effective regulation is the societal attitude about the value of what regulators do:

The Regulation Crisis, by James Surowiecki: A few weeks after B.P.'s Deepwater Horizon oil rig blew up and crude started spewing into the Gulf, Ken Salazar, the Secretary of the Interior, ordered the breakup of the Minerals Management Service—the agency ... supposedly in charge of offshore drilling. It was a well-deserved death: during the past decade, M.M.S. officials had let oil companies shortchange the government on oil-lease payments, accepted gifts from industry representatives, and, in some cases, literally slept with the people they were regulating. When the industry protested against proposed new regulations (including rules that might have prevented the B.P. blowout), M.M.S. backed down. ...
M.M.S.'s bad behavior was unusually egregious, but it's hard to think of a recent disaster ... that wasn't abetted by inept regulation. Mining regulators... Financial regulators... The S.E.C... These failures weren't accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary... The result is that agencies have often been led by people skeptical of their own duties. ...
The obvious problems of graft and the revolving door between government and industry, in other words, were really symptoms of a more fundamental pathology: regulation itself became delegitimatized... This view was exacerbated by the way regulation works... Too many regulators, for instance, are political appointees, instead of civil servants. This erodes the kind of institutional identity that helps create esprit de corps, and often leads to politics trumping policy. Congress, meanwhile, often takes a famine-or-feast attitude toward funding, allocating less money when times are good and reinflating regulatory budgets after the inevitable disaster occurs. ... This ... also contributes to the sense that regulation is something it's O.K. to skimp on. ...
[T]he history of regulation both here and abroad suggests that how we think about regulators, and how they think of themselves, has a profound impact on the work they do. ... So reforming the system isn't about writing a host of new rules; it's about elevating the status of regulation and regulators. More money wouldn't hurt: as ... George Stigler and Gary Becker point out, paying regulators competitive salaries ... would attract talent and reduce the temptations of corruption. It would also send a message about the value of what regulators do. That's important... If we want our regulators to do better, we have to embrace a simple idea: regulation isn't an obstacle to thriving free markets; it's a vital part of them.

links for 2010-06-06

Posted: 06 Jun 2010 11:03 PM PDT

"What Do Markets Want?"

Posted: 06 Jun 2010 01:26 PM PDT

The G20 recently recommended that countries begin reducing their budget deficits immediately. The argument is based upon the idea that "giving the markets what we think they may want in future – even though they show little sign of insisting on it now – should be the ruling idea in policy." However, the recovery is still relatively weak, and Kevin O'Rourke wonders why the G20 wants to risk sending Europe back into recession. He argues that "low unemployment and economic growth are among the fundamentals which have to be right, if government policies are to be credible in the eyes of the markets." Cutting deficits now, before the economies have recovered sufficiently, risks upsetting markets by causing lower growth and higher unemployment:

What do markets want?, by Kevin H. O'Rourke: The news that the European Commission's Economic Sentiment Indicator fell sharply in May underlines the economic risks the continent is now facing. With governments around Europe moving towards fiscal austerity,... the danger that Europe will move back into recession seems clear.

Why are European governments embarking on such a risky strategy? ... What ... do markets want? As it happens, the EMS crisis of 1992-1993 taught us a lot about what markets want. ... Readers will recall that the commitment of peripheral European economies to stick to the Deutschemark was brought into question when German interest rates started to rise in the wake of German reunification, and countries like Italy and the UK started to suffer serious competitiveness problems. The initial response of politicians was a macho one: get the fundamentals right and the problem would go away. The fundamentals concerned were, of course, low inflation, low deficits, and low levels of government debt...: if governments could gain credibility in the markets' eyes, the speculation against their currencies would stop.

However, the speculation did not stop, leading once again to the question: what do markets want?
The lesson of the EMS crisis is that low unemployment and economic growth are among the fundamentals which have to be right, if government policies are to be credible in the eyes of the markets. ... Speculators bet that governments would not, in the long run, be able to sustain policies which led to rising unemployment: far from enhancing credibility, the 'responsible' and deflationary policies which governments thought markets wanted fatally undermined it. And thus ... the market forced governments in the UK and elsewhere to adopt policies that were softer, and more growth-oriented, than what orthodoxy had been demanding. ...
The lessons ... seem clear. Markets may indeed not be willing to lend to peripheral governments unless they take remedial action to fix their public finances: so be it. But in the long run, markets will not be willing to lend to countries whose economies are continually contracting. ... Too much austerity at the wrong time will not make governments more credible, but less so. ...
Those economies with fiscal space need to use it now. Furthermore, we should be asking whether the European Union as a whole, or perhaps the eurozone, might be such an economy. Major European investments in new transportation and energy infrastructures are needed in the long run anyway. If the Union embarked on them now, it would become part of the solution to our problems: if it becomes a mechanism for imposing asymmetric and deflationary adjustment on the continent, it will be seen, rightly, as one of the causes.
And the markets won't like that.

Paul Krugman isn't happy with the G20's recommendation for austerity either. See here.

"Private Sector 'Make Work' Jobs?"

Posted: 06 Jun 2010 01:17 PM PDT

Maxine Udall:

Private Sector "Make Work" Jobs?, by Maxine Udall: A private sector-inflated housing bubble resulted in a huge excess of housing, which Douglas Duncan, vice president and chief economist for Fannie Mae, is now suggesting might be better to bulldoze. Who will pay for the bulldozing I wonder? Not the same people who built or financed the now worthless houses, I'll bet (although it does have possibilities as a job creation program).
It seems to me that in effect this is equivalent to saying that all that private-sector housing construction (at least in some markets) was nothing but "make work." So how is this different from using public money to create jobs by hiring a million people to dig ditches that we intend to fill in later?
Oh, right, the private sector did it so it must be an efficient allocation of resources.
My point being not that it's OK to use public monies to create any old make work job just because some parts of the private sector seem to have lost their ability to deliver goods and services efficiently. I think you all know I would prefer publicly funded jobs be created to build infrastructure and to invest in future productivity by improving education and health. Rather, it's that the near religious faith that the private sector is always and everywhere efficient needs to be questioned and questioned frequently. Especially when the taxpayer costs of cleaning up after it are likely to be high and (attention deficit hawks!) lead to higher deficits. (Hello, BP! Yes, I'm waiting to see how much of that private sector debacle actually gets internalized by BP and its subcontractors).
The problems, of course, are that in some cases the private sector is not "efficient" (or ethical) and in some cases publicly-funded regulators are at best asleep at the wheel, at worst wholly owned by those that they are charged with regulating. I occasionally have apocalyptic visions in which a "sustainable" economy becomes one in which the private sector with increasing regularity imposes huge costs on the rest of us while the public sector becomes entirely devoted to cleaning up after them. Talk about "make work." And why would that be regarded as less of a waste of taxpayers' dollars than, say, providing health insurance and income security to the disadvantaged and elderly?
At present, it looks very much like segments of the private sector are as insulated from market forces as are segments of public regulatory agencies. Both sectors need to become accountable and efficient (and ethical). Drowning one of them in the bathtub while allowing the other to remain unfettered and unaccountable (except periodically when they blow up finance or the environment) is not likely to accomplish this.

I am also on record saying that government job creation programs should employ people to do the highest valued tasks available, no sense digging holes and filling the again if there are worthwhile things to do instead. But I don't like the "make work" label that is attached to some types of job creation efforts in an attempt to undermine them and block their implementation (this is not directed at Maxine).

Let me give an analogy. When I was a kid, if I was sitting around the house and complained I didn't have anything to do, my mom would always respond the same way. "I'll find something for you to do," and she would. It was make work, she was finding something for me to do on the spot to cure my unemployment problem (I couldn't find "employment" on my own, I was sitting around unable to find anything to do), but it was always work of value. The suggestions (OK, orders, at that point I had to do it, the real point was to stop me from sitting around and complaining in the future) were always for things of value, things that very much needed to be done but that she just hadn't had time to get to herself. There was always a list, a backlog of things that needed attention, and the items on the list were not just sending me outside to dig holes and fill them up to get me out of her hair (though with no "make work" available, she might have done that given how annoying I could be at that age). The jobs were things that very much needed to be done.

The question, then, is are there worthwhile things for people to do that can be implemented faster than, say, a major infrastructure projects? Infrastructure projects are good for providing a sustained increase in employment and demand, and they are easy to justify in terms of their payoff to long-run growth, so they should be part of the policy portfolio. But infrastructure projects often take too much time to put into place, especially, like now, when we've just taken advantage of the "shovel ready" opportunities. When quicker solutions are needed, as now, reliance on this type of spending may not be the best way to provide employment and create the demand needed to fuel a recovery. If you look around the city or countryside with the same eye that my mom looked around the house, you will find many, many things that need to be done, things of high value to residents in the area. There's a whole backlog of useful things that people could be put to work on, and with unemployment so high and interests rates (i.e. the required return on spending) so low, it would be a good time to pursue these projects vigorously. They may not have the same payoff in terms of long-run growth, but they are of value nonetheless and we ought to put people to work on these projects to bridge the gap until the private sector recovers. Not only will it provide employment, the extra demand that is created by having more people earning paychecks will push the recovery along and thereby shorten the time until the private sector can provide the jobs that are needed.

"Put Jobless Young People to Work Cleaning Up BP’s Mes"

Posted: 06 Jun 2010 10:53 AM PDT

Robert Reich has a wish:

Put Jobless Young People to Work Cleaning Up BP's Mess and Order BP to Pay, Robert Reich Friday's job report was awful. For most new high school and college grads finding a job is harder than ever. Meanwhile, states are cutting summer jobs for disadvantaged young people. What to do with this army of young unemployed? Send them to the Gulf to clean up beaches and wetlands, and send the bill to BP. ...
[W]e've got hundreds of thousands of young people sitting on their hands right now because they can't find jobs. Many are from affected coastal areas, where the tourist and fishing industries have been decimated by the spill.
The President should order BP to establish a $5 billion clean-up fund, and immediately put America's army of unemployed young people to work saving the Gulf coast. Call it the new Civilian Conservation Corps.
(The old CCC — created by FDR at another time of massive unemployment and environmental stress — gave millions of young Americans jobs and training to reforest lands that had been degraded, provide emergency flood relief in the Ohio and Mississippi valleys, and build the infrastructure for our national parks.)

This isn't exactly what he has in mind, but it's along the same lines. John Whitehead:

Green jobs: "Unemployed Hired to Clean Affected Beaches":

via www.deepwaterhorizonresponse.com: The Unified Command in Mobile announced today the first deployment of the Qualified Community Responder (QCR) program that will put unemployed individuals to work in the counties that may be affected by the oil spill. Working closely with the Alabama, Mississippi, and Florida unemployment offices, unemployed workers have been hired to help with the cleanup effort.  A similar program exists in Louisiana.

Starting today some 400 QCR workers in Florida and Alabama began cleaning affected beaches....

The plan is to train more than 4,500 workers in the three states in the Mobile Sector (1,500 in Alabama, 1,500 in Mississippi, and 1,600 in Florida). To date there are 2,946 people trained and ready to be deployed (978 in Alabama, 1,500 in Mississippi, and 468 in Florida). 

I'm assuming that these states will send a bill to BP, they should, and if they do then it is even closer to what Reich has in mind. With respect to Reich's idea, if we go that route I'd prefer to have the government in charge of the clean-up rather than BP, with BP billed later. And I don't see any reason to cap the bill at $5 billion. It will take whatever it takes to clean up after this mess (as though we can simply wash away the damage), and BP should pay the entire bill. If it bankrupts BP, too bad, they should still pay as much as possible with the government making up any shortfall in the amount needed to do the clean up job properly.

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