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June 11, 2010

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Latest Posts from Economist's View


Household Net Worth off $11.4 Trillion

Posted: 11 Jun 2010 12:42 PM PDT

Calculated Risk looks at the most recent data on household net worth:

Q1 Flow of Funds: Household Net Worth off $11.4 Trillion from Peak, by CalculatedRisk: The Federal Reserve released the Q1 2010 Flow of Funds report today. According to the Fed, household net worth is now off $11.4 Trillion from the peak in 2007, but up $6.3 trillion from the trough in Q1 2009. A majority of the decline in net worth is from real estate assets with a loss of about $6.4 trillion in value from the peak. Stock market losses are still substantial too.

Household Net Worth as Percent of GDP
Click on graph for larger image in new window.

This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.
Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles. ...

Bubble? In that graph? What bubble? There's no way to see a bubble before it pops...

Too Big to Exist?

Posted: 11 Jun 2010 12:33 AM PDT

pgl at EconoSpeak:
...While the "drill baby drill" proponents of offshore drilling used to tell us that we had the technology to keep oil spills from happening or once they did happen from becoming environmental nightmares - as we have recently learned, technology has not advanced that much. If oil companies are shielded from paying more than pennies on the dollar for such potential problems, it is no wonder they under-invest in this technology. The stock market seems to be signaling that BP shareholders may indeed pay much more than pennies on the dollar. If that does happen, bravo! ...
John Boehner voices a very different view than mine:
In response to a question from TPMDC, House Minority Leader John Boehner said he believes taxpayers should help pick up the tab for the clean up. "I think the people responsible in the oil spill--BP and the federal government--should take full responsibility for what's happening there," Boehner said at his weekly press conference this morning. Boehner's statement followed comments last Friday by US Chamber of Commerce CEO Tom Donohue who said he opposes efforts to stick BP, a member of the Chamber, with the bill. "It is generally not the practice of this country to change the laws after the game," he said. "Everybody is going to contribute to this clean up. We are all going to have to do it. We are going to have to get the money from the government and from the companies and we will figure out a way to do that." So today I asked Boehner, "Do you agree with Tom Donohue of the Chamber that the government and taxpayers should pitch in to clean up the oil spill?" The shorter answer is yes.
This sounds like the Congressman wants us to subsidize negative externalities.

Essentially, the well was too big too fail, but it failed anyway. Technology has given us the ability to create things whose individual or collective failure can cause tremendous damage, from oil wells to complicated financial assets, more so than ever before.

It is evident that we need to do a much better job of evaluating and regulating these types of risks. If the answer to the question "what if there's a problem and all of our safeguards fail" is "there will be a huge disaster," and if we really can't quantify the true risks due to black swans, etc., or be absolutely certain we can handle or even think of every possible contingency, then perhaps these technologies are too big to safely exist.

"Frugality Fatigue"?

Posted: 11 Jun 2010 12:24 AM PDT

What does this tell you?:

Wealthy Are the Only Ones Spending, by Phil Izzo: Retail sales are expected to have increased a bit in May, but a new poll indicates that the spending is primarily coming from wealthier and older consumers.

The government releases its report on retail sales for May tomorrow, and economists [predict] total sales increasing 0.2% from April. ... But a new poll from Gallup indicates that consumers who make more than $90,000 account for the bulk of that spending increase. ...

Higher-income "consumers seemed to be holding back on spending prior to May in response to the length and depth of the recession, the financial crisis, and a general feeling of economic uncertainty," wrote Dennis Jacobe, Gallup chief economist. "In May, this seemed to change. It could be that many upper-income consumers are experiencing 'frugality fatigue.'"

The result is consistent with the picture in the U.S. labor market. In May, the headline U.S. unemployment rate declined to 9.7% from 9.9%, but all of the gains came from workers with a bachelor's degree or higher, which tend to include the highest paid workers. ... The unemployment rate jumped to 15% for those with less than a high school diploma and climbed to 10.9% for high school graduates. ...

links for 2010-06-10

Posted: 10 Jun 2010 11:03 PM PDT

"21st Century Regress"

Posted: 10 Jun 2010 02:35 PM PDT

Maxine Udall:

21st Century Regress, by Maxine Udall: Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it. BP continues to obliterate the Gulf of BP (as far as I'm concerned, they broke it, they now own all of it), the party of personal accountability and small government somehow thinks the buck for this private sector fiasco stops at President Obama, and as far as I can tell President Obama seems to have drunk this convenient kool-aid, too, with a little nudging from the furies on both sides of the MSM. (I know, I know, it was the guvmint regulators' fault, so it was Obama's fault AND we should stop trying to regulate anything. Convenient, that.) Meanwhile, our lawmakers in Washington appear to be beating a hasty retreat from anything that would pass as fair and just for the unemployed...[list of problems continues]...

Sometimes it's just too much to take in and process and I'm left feeling a tad out of sorts. So this week I did what has become my usual strategy when the 21st century overwhelms me: I retreat to the 18th century.

I don't really want to go back to the 18th century. For one thing, as far as I can tell there were no girl economists and certainly no blogs then. Also, I like to vote and own property and I especially like it that I am not property, my husband's or my father's. And I suspect they're both glad about that, too.

What I want to retrieve from the 18th century are men (and there must have been some women) like Adam Smith. I want to retrieve not just his ideas. I want to retrieve his way of thinking, his world view (except anchoring everything to feudalism as the standard for comparison, although maybe in time that will become relevant again), and most of all I want to retrieve his way of expressing himself. He is eloquent, clear if not always concise, thoughtful, and seems motivated in most things by a kind and generous heart. He seems the perfect balance justice, prudence, and beneficence as he examines both our evolution as moral beings and the evolution of the wealth of nations.

His way of thinking encompassed history, other nations, the well-being of nations, the well-being of individuals, particularly those less advantaged, the problems that arise when economic interests influence governance, and the forces seen and unseen that cohere society into something we all might like to live in. He was not an entirely impartial spectator from his window on the 18th century. He seems to have cared about people at the bottom of the economic and educational pyramid and he most certainly cared about the effects on the general welfare of backroom deals between business interests and between business and political interests. His impartiality was in his willingness to step back and outside of his place in space and time. To consider the world from what he imagined to be the perspective of others, those more advantaged and those less advantaged, those from other countries, and those with whom he probably had very little in common.

I especially envy his world view. He seems convinced that there is a natural order and that natural order will eventually move us as a species (with some detours and dead ends) over time to a better world. I have often wondered if his beliefs in a natural order that inevitably moves us to a better place accounts for his apparent beneficence.

And I wonder what he would make of our current situation? Would he still be using feudalism as his point of comparison? I doubt it. I think he would almost certainly conclude that at least in developed countries, we are all much better off materially and in terms of education, skills, transportation, health, disease control, and sanitation and that most of us enjoy far better work environments than 18th century laborers. He would probably also think that despite BP, we are better off environmentally. (If you doubt it, imagine wading through horse, cow and sheep droppings every time you left your front door. Imagine cesspools that leech into municipal water supplies.) But I wonder if he wouldn't be troubled by many of the same things that troubled him in the 18th century: backroom deals between business interests and between business and political interests that harm the public.

The thing I think I like most about Smith is that he did not live in a world of randomized controlled trials, existence proofs, and simplified models. Smith was interested in causes, not associations, so would most likely have been happy to rely on results from a randomized experiment. However, in Smith's world, X seldom "caused" Y, unless X was a highly complex vector of intended and unintended effects of some political and/or economic action or actions that played out over history and led eventually to X. He pays  attention to sorting out those unintended effects. When he finds they lead to positive things for a country, like courts that are independent of monarchs or rationally self-interested owners of capital who employ that capital within their own country rather than other countries, he finds this evidence of the natural order wending to a better place for all of us.

I believe another dimension of our current situation that would trouble Smith is the potential regress of our ethics. My reading of Smith suggests that he conceptualized the moral evolution of humans, both in a single lifetime and over time in a society, as a complex feedback relationship between individual moral sentiments and the moral norms and institutions of a society. Initially moral sentiments that shape moral behavior are ingrained in children by parents and other significant adults. Over time, as the child matures, there are positive (!) peer effects that shape the child to care about what others think of him or her. The peer effects cause a child to develop feelings for others that in turn cause the child to want their approval and they the child's. Smith imagined though that over time a mature ethical being would develop a moral center that no longer depended on the approval or admiration of others. Instead, an inner man (or woman) would become the arbiter of moral intent and action. That inner arbiter would be impartial, able to observe and evaluate intent and action, not only from the self-interested perspective of oneself, which we now know to be fraught with the potential for cognitive dissonance, but from the perspective of all persons, the larger society, and even (gasp!) future generations. At this point, a person has stopped merely conforming to societal norms and has become an autonomously moral being.

Autonomously moral beings seem like a good thing. In an ideal world they internalize externalities, they reduce transactions costs, they would almost certainly reduce the size of the legal system. An autonomously moral person would not ask "Is it legal?" She would ask, "Is it right?" and, having answered  in the negative, would refrain from, say, offering pick-your-payment ARM mortgages to people who have no hope of repaying the loan.

Smith viewed society as progressing to greater "opulence" and more virtue. However, he recognized that moral sentiments are shaped by a society's practices. Someone who grows up in a society where, say, slavery is viewed as morally right, is likely to internalize that view and may never come to question it. This is one reason why an inner impartial observer that can put itself in the place of the slave might result in that person realizing that slavery is wrong regardless of the prevailing norms. To the extent that individuals are able to do this, they will over time shape norms and institutions, which in turn will cause moral sentiments to progress.

Or regress.

It is when I come to this part of Smith that the 18th century no longer brings comfort to me. I find myself asking: how are the recent failures of large corporations, recently granted by law the right of a citizen to participate in and shape political discourse, sentiment, and outcomes, but apparently exempt from a citizen's obligation to refrain from harming others (even in the absence of alert regulators) shaping norms and institutions in the 21st century? How does failure to hold investment bankers and rating agencies accountable affect the hard-wired sense of fairness and the moral sentiment of resentment that many of us feel? If BP is not held accountable, how will that trickle down and shape the moral sentiments of the citizenry? Will our inner impartial moral arbiter waiver as we confront decisions about how we should act toward our neighbor, our community, and our nation?

Adam Smith believed humanity (or at least England) was progressing in wealth and in ethics. To date, we have all tended to focus on the financial aspects of these crises in corporate judgment and management. I'm pretty sure Adam Smith would also have noticed that the potential for moral hazard extends far beyond the relatively unscathed main players. There will almost certainly be a moral trickle down that corrupts production and exchange at all levels of our society. An advanced, technologically complex nation that cannot or will not achieve the basics of accountability and restitution (aka justice) with financial and corporate entities that have harmed its citizenry deeply and lastingly is (I very much fear) evidence of the beginnings of a failed state. That the failure will be economic and moral, as well as political, is probably no coincidence.

How Should We Respond to Regulatory Failure?

Posted: 10 Jun 2010 01:35 PM PDT

I keep reading arguments that start with the fact that regulators have been imperfect in the past and use it to argue that we should eliminate (or substantially reduce) the amount of regulation that is imposed. However, just because regulators missed things in the past like Bernie Madoff, the financial meltdown, and the risks that BP was taking does not imply that regulation ought to be reduced or eliminated.

If there is a lot of crime that should have been prevented but wasn't, do we disband the police department or try to figure out how to make it better? It would be silly to suggest that the answer to the failure to prevent crimes is to get rid of the police, and it's equally silly to assert that the solution to poor regulation is to quit trying to regulate. Yes, it's possible that in some cases the regulation can do more harm than good (the equivalent of a law that imposes more restraints, i.e. costs, on the law-abiding than it produces in terms of the value of the problems it prevents). But for the most part, we are trying to prevent behavior that has significant costs, e.g. oil spills, financial meltdowns, fraud, etc., and throwing our hands up and saying there's nothing we can do about it is not the answer.

Another argument I hear is that regulators will always be behind, that innovations in, say, the financial market will always stay one step ahead of attempts to constrain their behavior. However, in general criminals are always one step ahead of law enforcement, or at least they try, but we don't conclude that this means we should quit trying to enforce the laws. Instead, we do our best to keep up with the latest attempts to evade the law by enhancing, for example, the technical abilities of the police so that they can match the abilities of those trying to use digital or other technology to commit crimes that go undetected.

Regulators certainly made mistakes, and there is plenty of room for improvement, but does that mean we should abandon attempts to regulate? Of course not. We need to figure out how to do a better job at regulation just like we need to try to improve the ability of law enforcement to prevent and solve crimes when crime gets out of hand -- we generally add resources to police departments when there is more crime than we can tolerate -- and our response to regulatory failures ought to be the same.

So sure, get rid of the unnecessary regulation where you can find it, but for the most part problem's such as BP and the financial meltdown are not the result of too much regulation. The problem is the existence of outdated rules that failed to keep up with changes in the industry, the lack of effective enforcement due to not having enough regulators, not being able to match the skills found in the private sector, and so on, all of which are best solved by giving more attention and resources to regulatory issues, not less.

I'm pushing this argument to its extremes, more so than those making it intend, but saying that regulators failed, therefore we need to get rid of regulation, is not the conclusion we should draw. If regulators weren't up to the job, or if the regulations were inadequate as in the case of the unregulated shadow banking sector, then we need to strengthen our ability to regulate. Those on the right pushing the "government failed" message in response to recent crises are, in my view, making a pretty good case for expanding the size and scope of the regulatory agencies.

Initial Claims for Unemployment Insurance Remain Stagnant

Posted: 10 Jun 2010 11:34 AM PDT

I haven't looked at initial claims for unemployment since the beginning of May. Unfortunately, the news in the latest report isn't very good:

Initial Claims for Unemployment Insurance Remain Stagnant

The post argues that we are unlikely to see improvement in this series -- one of the key indicators of the health of labor markets -- any time soon.

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