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October 1, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Taking On China

Posted: 01 Oct 2010 01:11 AM PDT

A "shot across the bow of U.S. officials":

Taking On China, by Paul Krugman, Commentary, NY Times: Serious people were appalled by Wednesday's vote in the House of Representatives, where a huge bipartisan majority approved legislation, sponsored by Representative Sander Levin, that would potentially pave the way for sanctions against China over its currency policy. As a substantive matter, the bill was very mild; nonetheless, there were dire warnings of trade war and global economic disruption. Better, said respectable opinion, to pursue quiet diplomacy.
But serious people, who have been wrong about so many things since this crisis began ... are wrong on this issue, too. Diplomacy on China's currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation. The hype about trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China's predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries.
Let's step back and look at the current state of the world.
Major advanced economies are still reeling from the effects of a burst housing bubble and the financial crisis that followed. ... The situation is quite different, however, in emerging economies. These economies have weathered the economic storm, they are fighting inflation rather than deflation, and they offer abundant investment opportunities. Naturally, capital from wealthier but depressed nations is flowing in their direction. And emerging nations could and should play an important role in helping the world economy as a whole pull out of its slump.
But China, the largest of these emerging economies, isn't allowing this natural process to unfold. Restrictions on foreign investment limit the flow of private funds into China; meanwhile, the Chinese government is keeping the value of its currency ... artificially low..., in effect subsidizing its exports. And these subsidized exports are hurting employment in the rest of the world.
Chinese officials defend this policy with arguments that are both implausible and wildly inconsistent. ...
Meanwhile, about diplomacy: China's government has shown no hint of helpfulness and seems to go out of its way to flaunt its contempt for U.S. negotiators. In June, the Chinese supposedly agreed to allow their currency to move toward a market-determined rate — which ... would have meant a sharp rise in the renminbi's value. But, as of Thursday, China's currency had risen about only 2 percent against the dollar — with most of that ... in just the past few weeks, clearly in anticipation of the vote on the Levin bill.
So what will the bill accomplish? It empowers U.S. officials to impose tariffs against Chinese exports subsidized by the artificially low renminbi, but it doesn't require ... action. And judging from past experience, U.S. officials will not, in fact, take action — they'll continue to make excuses, to tout imaginary diplomatic progress, and, in general, to confirm China's belief that they are paper tigers.
The Levin bill is, then, a signal at best — and it's at least as much a shot across the bow of U.S. officials as it is a signal to the Chinese. But it's a step in the right direction.
For the truth is that U.S. policy makers have been incredibly, infuriatingly passive in the face of China's bad behavior — especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else. The Levin bill probably won't change that passivity. But it will, at least, start to build a fire under policy makers, bringing us closer to the day when, at long last, they are ready to act.

"America’s Deepening Moral Crisis"

Posted: 01 Oct 2010 12:51 AM PDT

Jeff Sachs is unhappy with "almost everybody":

America's Deepening Moral Crisis, by Jeffrey D. Sachs, Commentary, Project Syndicate: America's political and economic crisis is set to worsen following the upcoming November elections. President Barack Obama will lose any hope for passing progressive legislation aimed at helping the poor or the environment. ...
Much of America is in a nasty mood, and the language of compassion has more or less been abandoned. Both political parties serve their rich campaign contributors, while proclaiming that they defend the middle class. Neither party even mentions the poor...
America today presents the paradox of a rich country falling apart because of the collapse of its core values ..., the country is in the throes of an ugly moral crisis. Income inequality is at historic highs, but the rich claim that they have no responsibility to the rest of society. They refuse to come to the aid of the destitute, and defend tax cuts at every opportunity. Almost everybody complains, almost everybody aggressively defends their own narrow and short-term interests, and almost everybody abandons any pretense of looking ahead or addressing the needs of others. ...
The big campaign contributors to both parties pay to ensure that their vested interests dominate political debates. That means that both parties increasingly defend the interests of the rich, though Republicans do so slightly more than Democrats. ...
The result of all of this is likely to be a long-term decline of US power and prosperity, because Americans no longer invest collectively in their common future. America will remain a rich society for a long time to come, but one that is increasingly divided and unstable. Fear and propaganda may lead to more US-led international wars, as in the past decade. ...
 America is vulnerable to social breakdown because it is a highly diverse society. Racism and anti-immigrant sentiments are an important part of the ... reason why so many are willing to heed the propaganda against helping the poor. ...
The lesson from America is that economic growth is no guarantee of wellbeing or political stability. American society has become increasingly harsh, where the richest Americans buy their way to political power, and the poor are abandoned to their fate. In their private lives, Americans have become addicted to consumerism, which drains their time, savings, attention, and inclination to engage in acts of collective compassion.
The world should beware. Unless we break the ugly trends of big money in politics and rampant consumerism, we risk winning economic productivity at the price of our humanity.

"Revolving Door" Lobbyists: The Value of Political Connections

Posted: 01 Oct 2010 12:30 AM PDT

Lobbyists are valued more for who they know than for what they know:

"Revolving door" lobbyists: The value of political connections in Washington, by Jordi Blanes i Vidal, Mirko Draca, and Christian Fons-Rosen, Vox EU: Lobbyists – paid advocates who aim to influence the decisions of legislators or government officials – play an increasingly important role in the political system of the US and other democracies. In 2008, for example, $3.97 billion was spent on lobbying US federal officials – more than twice the amount spent ten years earlier.
The recent US debates on healthcare and financial reform have been marked by sharp criticisms of the role of staffers-turned-lobbyists in watering down the bills. For example, in academic circles, the political economy of financial reform has recently been discussed by Johnson and Kwak (2010), Mian et al. (2010), and Igan et al. (2009) among others.
The movement of political staffers from roles in the government to lucrative jobs in the lobbying industry is often described as a "revolving door". This flow of money and staffers towards Washington's lobbying firms has led to concerns that corporations and other organizations are able to buy influence and acquire privileged access to serving politicians. Furthermore, ex-staffers gain private benefits in such transactions, and this may have a negative impact on their incentives before leaving Congress.
To what extent can former government officials "cash in" on the personal connections acquired during their periods of public service? Our recent research (Blanes i Vidal et al. 2010) provides the first quantitative evidence of how former congressional staffers benefit from Washington's "revolving door".
Is it what you know or who you know?
The most common criticism of former staffers is that they are simply trading on their political connections. But lobbyists often dispute this notion. They claim instead that their earnings reflect expertise on policy issues and the inner workings of government in general. In other words, they argue that it is "what you know" not "who you know" that matters.
Empirically, the issue of separating the "what you know" from the "who you know" is a challenge for researchers. A plausible argument can be made that former staffers would be high earners even if political connections did not matter. The specific problem here is separating the effects of ability and expertise on earnings from those of acquired political connections. Generally, earnings or revenue data only allow us to observe the effects of both factors together.
Our research addresses this founding of causes by focusing on situations where the knowledge doesn't change but the connections do. Specifically we look at the impact on lobbyist income when a serving politician leaves office. The point at which a politician leaves office provides a window for examining the specific role of political connections. If a politician is no longer serving in Congress, then the political connection held by their former staffers should in effect be obsolete.
This is because the politician in question no longer has direct influence over legislative outcomes or the content of congressional debates. In turn, this means that in cases where gaining access is a goal of special interest groups, lobbying spending will move away from lobbyists affiliated with former politicians and towards those with still current connections.
Our estimates based on this "identification strategy" indicate that the value of political connections to lobbyists is high. Lobbyists suffer an average revenue loss of over 20% when their former political employer leaves Congress. In dollar terms, this translates into $177,000 per year for the typical lobbyist's practice. Furthermore, this effect is persistent for at least three years – it seems that it is difficult for lobbyists to offset the impact of a lost political connection. ...

links for 2010-09-30

Posted: 30 Sep 2010 11:02 PM PDT

DeLong: Economics for Parrots

Posted: 30 Sep 2010 01:17 PM PDT

More (all too rushed) between classes blogging. From Brad DeLong at Project Syndicate:

Economics for Parrots, by J. Bradford DeLong, Commentary, Project Syndicate: It is said that the early nineteenth-century British economist J.R. McCulloch originated the old joke that the only training a parrot needs to be a passable political economist is one phrase: "supply and demand, supply and demand." Last week, US Federal Reserve Chairman Ben Bernanke said that McCulloch's economics – the economics of supply and demand – was in no way discredited by the financial crisis, and was still extraordinarily useful.
It's hard to disagree with Bernanke's sentiment: economics would be useful if economists were, indeed, likeMcCulloch's parrots – i.e., if they actually looked at supply and demand. But I think that much of economics has been discredited by the manifest failure of many economists to be as smart as McCulloch's parrots were. ...[...continue reading...]...

Making Shadow Banking Safer: An Insurance Approach

Posted: 30 Sep 2010 12:06 PM PDT

One of the big problems during the financial crisis was a bank run in the shadow banking system when doubts emerged about the safety of deposits.

In my last column at the Fiscal Times, I talked about an approach to solving the problem that involves having deposits in the shadow system backed (insured) by high quality collateral.

But high quality collateral is not the only option. Another way to do this is through a type of insurance along the lines of what the FDIC does for the traditional banking system, along with restrictions on eligibility for the insurance. In reaction to my column, and in support of the insurance approach, Morgan Ricks of Harvard Law School emails:

I enjoyed your Fiscal Times piece and am glad you're focused on this issue.

I'm a big admirer of Gary and Andrew's work, but I would encourage you to give some more thought to whether collateral requirements for repo are likely to do the trick. Here are a few things to consider:

  • Many of the short-term liabilities of the shadow banking system were and are uncollateralized (think about Lehman's reliance on unsecured commercial paper -- the default of which caused the Reserve Fund to "break the buck," igniting the run on money market funds; and Citigroup's SIVs, which financed themselves in the unsecured markets).
  • Money market investors do not want to take possession of collateral and dispose of it. Even if the collateral is high quality, they don't want the interest rate risk. That's not their business. They don't want to deal with the consequences of a counterparty default. This is why, in the crisis, many money market investors stopped rolling even those repos that were fully secured by Treasuries and agencies:
    • See Chris Cox's testimony on Bear Stearns (here "For the first time, a major investment bank that was well-capitalized and apparently fully liquid experienced a crisis of confidence that denied it not only unsecured financing, but short-term secured financing, even when the collateral consisted of agency securities with a market value in excess of the funds to be borrowed"
    • See also FRBNY's repo task force report (here "Discussions in the Task Force emphasized repeatedly that many Cash Investors focus primarily if not almost exclusively on counterparty concerns and that they will withdraw secured funding on the same or very similar timeframes as they would withdraw unsecured funding."
  • Even if collateral requirements reduce the likelihood of runs, how do we calibrate them -- what is the objective function? Presumably we think maturity transformation (fractional reserve banking) is a good thing -- it increases the supply of loanable funds by pooling otherwise idle cash reserves and deploying them toward productive investments. Risk constraints (such as collateral requirements) necessarily reduce this surplus -- there is a real social cost. How do we appraise the corresponding benefit? That is, how do we estimate the systemic instability associated with any given level of collateral requirements? My argument is that we can't. And by "we" I mean not just the government, but anybody.

My paper argues that we avoid these problems with an insurance regime; that financial firms outside the insurance regime should be disallowed from conducting maturity transformation (i.e., they would have to rely on term funding, not money market funding); and that we should develop functional criteria of eligibility for the insurance regime. (By the way, this is not the same thing as "extending" insurance to shadow banks.)

Anyway, these are things worth thinking about. I think the insurance approach needs more serious consideration than it has received -- it's a little lonely over here ...


Morgan Ricks

See here for nice summary of this approach and link to the underlying academic paper.

"Holding the Middle Class Hostage"

Posted: 30 Sep 2010 09:05 AM PDT

Austan Goolsbee, Chair of the Council of Economic Advisers, "tackles the tax cut fight and what it means that Congressional Republicans are 'holding middle class tax cuts hostage'"

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