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April 30, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: The Euro Trap

Posted: 30 Apr 2010 12:33 AM PDT

Deficit hawks are trying to use the "euro-mess" to support their case for austerity. But that's not the real lesson of the European crisis:

The Euro Trap, by Paul Krugman, Commentary, NY Times: Not that long ago, European economists used to mock their American counterparts for having questioned the wisdom of Europe's march to monetary union. ... Oops..., right now it does seem to have been a bad idea for exactly the reasons the skeptics cited. And as for whether it will last — suddenly, that's looking like an open question.
To understand the euro-mess — and its lessons for the rest of us — you need to see past the headlines. Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn't control their spending. But that's only part of the story for Greece, much less for Portugal, and not at all the story for Spain.
The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. ... And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.
Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro ... turned into a trap.
What's the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.
But that's a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates... Now..., however, the only way to reduce Greek relative costs is through ... deflation. ...
The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn't.
Hence the crisis. ... All this is exactly what the euro-skeptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.
So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they'll probably face severe bank runs anyway... This would open the door to euro exit.
So is the euro itself in danger? In a word, yes. If European leaders don't start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.
Meanwhile, what are the lessons for the rest of us?
The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro,... governments ... denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.
And when crisis strikes, governments need to be able to act. That's what the architects of the euro forgot — and the rest of us need to remember.

Fed Watch: We Can't All Be (Net) Exporters

Posted: 29 Apr 2010 11:16 PM PDT

Tim Duy:

We Can't All Be (Net) Exporters, by Tim Duy: The Greek crisis, which helped further extend the Dollar's uptrend in place since the beginning of the year, is a reminder that global imbalances are still with us - and, if not corrected, will eventually threaten the sustainability of the global recovery. Indeed, how sustainable can any recovery be if the vast majority of nations are pursuing an export oriented growth strategy? After all, clearly that is not a game all can play - there needs to be a net importer to offset the net exports. Who wants to fill that role? If the US is pushed into filling that role, we have simply come full circle over the past three years.

The Administration is clearly aware of this challenge, but concerns are growing that any action will fall short of what is necessary to bring about real change. From Sudeep Reddy at the Wall Street Journal:

President Barack Obama's goal of doubling U.S. exports over the next five years will be difficult to meet, business leaders and economists say, because of the lack of momentum on demolishing trade barriers and the shift by more American companies toward producing overseas.

U.S. exporters want Washington to put more pressure on trading partners to eliminate tariffs, crack down on intellectual-property violations and take a harder line on trading partners' currency policies. American firms say stronger action by the federal government could substantially boost prospects for U.S. exports.

Policymakers argue that it is far too early to admit defeat:

Christina Romer, chair of the White House Council of Economic Advisers, calls the administration's export target "an ambitious but reasonable goal."

"Going up 100% over a five-year period is not such a radical idea when you think about historical experience," she said, noting that exports increased more than 75% between 2003 and 2008. "It is going to be a gradual process. We are just starting the concrete steps in terms of what we can do to lower the fixed costs associated with exporting through trade promotion and commercial diplomacy."

Am I the only one that finds the Administration's focus on doubling exports somewhat disingenuous? Economic growth depends on net exports - doubling exports is a fine goal, as long as import growth is contained, such that the net effect is positive. But with the economy bouncing back, will import growth remain contained? Recent signs are not supportive - the recovery so far has ended the improvement in the real trade gap:


Moreover, Romer claims the process will be "gradual." Will it be so gradual that US firms will resume expansion of overseas capacity at the expense of domestic production? Back to the Wall Street Journal:

But the shift by more U.S. companies toward producing goods overseas is one of the factors that makes doubling exports tougher. These firms have built more factories in fast-growing foreign countries to serve emerging markets, so they often supply the goods and services from an overseas arm—not by loading shipping containers in the U.S.

American businesses say they must contend with a long list of disadvantages, from higher tax rates than in many countries to rising costs for benefits such as health care. U.S. producers also say an artificially low Chinese currency makes Chinese goods especially cheap in foreign markets and therefore tougher competitors for American goods.

Once that production leaves, I suspect it is largely gone for good, barring a very large, sustained, and broad-based shift in the value of the Dollar. To be sure, the Administration is pressing China to revalue the renminbi, but the pace of any appreciation is likely to disappoint. Moreover, the uptrend in the Dollar raises a new concern. From Yves Smith:

A further source of trouble is political. If the euro continues on its expected slide and the pound is devalued, the dollar's strength will put a major dent in the US ambitions to increase exports. Moreover, the rise in the greenback relative to other currencies will no doubt make China much more reluctant to revalue the renminbi against the dollar

Also, further pressure on the Euro is likely necessary to compensate for the fiscal drag of deficit containment in the PIIGS. Note too that recent events are driving capital to the US, holding down interest rates. From the Wall Street Journal:

Mortgage rates stayed flat last week, rising just slightly to 5.08% from 5.04% one week earlier, according to the Mortgage Bankers Association. So far, the big rise in rates that some had expected when the Federal Reserve ended its mortgage-backed securities purchase program last month hasn't materialized.

In fact, the instability in Europe amid looming debt woes for Greece and Portugal on Tuesday sent investors looking for safer assets such as the 10-year Treasury, to which fixed-rate mortgages are closely tied. That has helped to keep rates down.

Sustained low rates will help keep US demand from waning, so much the better for to fuel the flow of imports necessary to meet the needs and wants of US consumers (it is not coincidence that the trade deficit began improving when the faltering housing market took the steam off consumer spending). And, intriguingly, Japan looks ready to resume the export push. Also from the Wall Street Journal:

As many Japanese enjoy their annual "Golden Week" holidays starting Thursday, some of Japan's economic ministers will be traveling to the U.S. and Asia to pitch what they hope will become a new driver of the nation's growth: infrastructure exports.

Transport Minister Seiji Maehara will spend Thursday and Friday in Washington to promote Japan's superfast bullet-train system as it chases part of President Barack Obama's high-speed railway project, which has an initial $8 billion price tag. Central Japan Railway Co. is among the hopefuls on some projects.

Meanwhile, Economic Strategy Minister Yoshito Sengoku will be wooing officials in Vietnam to choose a consortium of Japanese nuclear-power companies over French and South Korean rivals. Vietnam last year approved a resolution to build its first two nuclear-power plants, estimated to cost about $10.5 billion at current rates.

"In the past, Japanese ministers were too proud to go out there and cheer for our companies as they worried about failing to deliver successful results," Mr. Maehara said. "I intend to play the role of the top salesman for Japanese companies as their success equals the nation's economic growth."

Tokyo has begun a push to help Japanese companies win multibillion-dollar infrastructure projects abroad as its domestic economy continues to slump and a population decline threatens to sink demand further.

At the same time, rising environmental concerns in developed nations and rapid expansion of emerging economies are resulting in bumper crops of projects in areas like railways, nuclear power and clean energy.

"There is no growth for Japan unless we enhance exports," says Hiroki Mitsumata, director of nuclear-energy policy at the Ministry of Economy, Trade and Industry. "No matter how superior our technology is, if it's confined within Japan, it will become obsolete like the species in the Galapagos."

Given the consistent global policy theme of "more exports," at least one US firm recognizes the potential for disappointment with the Administration's goal:

Todd Teske, chief executive of Briggs & Stratton Corp., a Wauwatosa, Wis.-based small-engine maker, says he is partly counting on more exports to rebuild his sales after the recent downturn. Briggs & Stratton already receives about a fifth of its $2 billion in revenue from sales abroad, particularly in Europe. Mr. Teske calls the U.S. goal of doubling exports a "lofty goal" and one worth pursuing. But he's realistic. "It seems like every country or region wants to fuel their recovery plan with exports," he said.

Bottom Line: My gut tells me that in any battle for export oriented growth, the US will come up the loser. When push comes to shove, the US will do nothing in response to the accumulation of dollar assets abroad. Ultimately, nations need to do more to support domestic demand to drive economic growth. But the risk is that as the broad global financial crisis continues to fade, nations will increasingly attempt to withdraw fiscal support for their economies - even more so with the Greece example now so vivid - and attempt to rely on external growth to compensate. It is not a game everyone can win. But if it deteriorates into competitive devaluations, it is a game everyone can lose.

links for 2010-04-29

Posted: 29 Apr 2010 11:07 PM PDT

Two Videos: Energy Security and the Milken-Roubini Debate

Posted: 29 Apr 2010 01:08 PM PDT

As I travel, here's an automatic post of video from two of the lunchtime sessions at the Milken Global Conference. First, the panel on "Geopolitics, Global Demand and the Quest for Energy Security":

Panel: Geopolitics, Global Demand and the Quest for Energy Security
  • Aris Candris, President and CEO, Westinghouse Electric Company
  • Wesley Clark, Army General (ret.) and former Supreme Allied Commander, NATO; Chairman, Rodman & Renshaw
  • Anne Korin, Co-Director, Institute for the Analysis of Global Security; Chair, Set America Free Coalition
  • Jay Pryor, Vice President, Corporate Business Development, Chevron
  • R. James Woolsey, Venture Partner, VantagePoint Venture Partners; Of Counsel, Goodwin Procter LLP; former Director, Central Intelligence Agency

Moderator: Brian Sullivan, Anchor, Fox Business Network

Second, here is video showing a debate between Michael Milken and Nouriel Roubini. I think Paul Kedrosky sums it up well:

There was some good stuff in the lunch discussion between Nouriel Roubini and Mike Milken at the Milken conference today. Note: It's long, and some segments are less interesting than others. Then again, there is the bit where Mike suggests the solution to the U.S's deficits & entitlements problem is in obesity -- the biological kind.

Here's the video from the session "Nouriel Roubini and Mike Milken Debate Where We've Been – Where We're Going":

HTML clipboard

Panel: Nouriel Roubini and Mike Milken Debate Where We've Been – Where We're Going

  • Michael Milken, Chairman, Milken Institute
  • Nouriel Roubini, Professor of Economics and International Business, Stern School of Business, New York University

Moderator: Matthew Winkler, Editor-in-Chief, Bloomberg News

April 29, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

"Obama the Centrist"

Posted: 29 Apr 2010 12:42 AM PDT

Brad DeLong:

Obama the Centrist, by J. Bradford DeLong, Commentary, Project Syndicate: Despite the frequent cries of ... Republicans that Barack Obama is trying to bring European-style socialism to the United States, it is now very clear that the US president wishes to govern from one place and one place only: the center. ...On all of these policies – anti-recession, banking, fiscal, environmental, anti-discrimination, rule of law, healthcare – you could close your eyes and convince yourself that, at least as far as the substance is concerned, Obama is in fact a moderate Republican named George H.W. Bush, Mitt Romney, John McCain, or Colin Powell. ... [...more...]

An attack on "Old-Fashioned Economics"

Posted: 29 Apr 2010 12:33 AM PDT

Nick Krafft argues that heterodox economists are right about the need to get rid of the assumption that individuals are rational utility maximizers:

In which I "attack old-fashioned economics," i.e. utility maximization, by Nick Krafft: At an off-campus discussion toward the end of my senior year of college, the topic of behavioral economics came up. Leading the discussion was a professor of mine, David Ruccio- whose blog I link to regularly- who argued that to really move forward with these iconoclast ideas, we still have to get rid of the max u thing- it's holding everything back. I didn't really agree with him at the time, or I just didn't know, but a recent panel I attended helped clarify why Ruccio, and other heterodox economists before him, are right, even if the panelists themselves don't want to see it it or admit.

The topic of the panel, hosted by the Brookings Institution, was "Happiness in a Time of Uncertainty." The panel was striking in it's premise- 4 mainstream economists discussing the topic of subjective well-being. A number of interesting points were raised. For instance, it was pointed out that people seem to be very adaptive with regards to happiness, such that they can settle into what one might consider a "bad" equilibrium but regain subjective happiness, and thus show little incentive to leave.

CAROL GRAHAM: But there is one major complication or a fly in the ointment so to speak, and that's adaptation. People seem to be able to adapt to high levels of adversity, poor health and all kinds of things and retain their natural cheerfulness or their natural happiness…People really can adapt to adversity. They also adapt to prosperity. As I thought about this around the world and how it aggregated up across societies I thought it's probably really good from an individual psychological perspective that people are able to adapt to adversity and maintain their natural cheerfulness, but it may also result in collective tolerance for bad equilibrium.

The comments from panelists also touched on what behavioural economics has been saying for a while- people do a lot of things that don't seem to be maximizing anything; there are myriad inconsistencies across time and across situations.

During Q&A, I raised the issue that these points seem to undermine the whole utility maximization assumption, and that we may need to completely overhaul the so-called microfoundations of neoclassical models (EJ Dionne, the moderator, called it an "attack on old-fashioned economics). Here's the exchange, copied from the event transcript (pdf):

Q: A lot of the comments that all of you have made point to the idea that people don't really seem to be maximizing happiness or utility at least not in measurably consistent way. Thinking about theoretical economics, how do we continue to go forward with neoclassical models that are based on a maximizing utility assumption?

ALAN KRUEGER: Behavioral economics is an important and growing branch of economics. It's been recognized. Daniel Kahneman won a Nobel Prize for his work on the limits of people's decision making. I think the real challenge for economics is to know when to apply lessons we've learned from the psychologists and when to return to revealed preference. I'd also caution on how we define utility because I don't think happiness is utility. Maybe it's an element in the utility function along with some of the other emotions that I mentioned before like spending time in a good mood or not being angry all day long and so on. I think we need to be careful not to equate our measures of subjective well-being with utility, and at the same time I think we have to be very careful to define utility in a way that's not tautological because often the way some of our colleagues in economics define utility, it's impossible to reject and what I think the work of Kahneman and others has shown is that people will make inconsistent choices depending upon the way that they're framed. You can change the parameters and they'll make choices which were not consistent with choices that were their interests before, so I think it's possible to demonstrate that people don't always behave in correspondence to the axioms that are necessary for utility maximization. But at the same time I think our measurement of subjective well-being is at a relatively early stage and I would be very cautious about going too far in the direction of equating well-being with utility.

KAREN DYNAN: I'll just jump in and say I think Alan did a nice job of describing both the potential good that's going to come out the behavioral research and the complications. I'm not a person who believes we need to throw out everything that we've been working with. I think if we could have incorporated cognitive limitations and information costs and biases into our standard models we could have gone a long way toward avoiding what we've been through in the last couple of years.

EDUARDO LORA: My only reaction to that question about the value of standard economics given all these developments I think is very much along the lines of what Alan said. I don't think that we should throw away what we had. What these new developments lead us to is to understand phenomena that were important for people's well-being that could not be related with standard economics and that's precisely why I see that this area of public goods is so important and so amenable to this approach because certainly the way that we economics were trying to approach many of these problems of public goods didn't go anywhere, they were just approaches that were too convoluted, while this view provides an approach that is very simple and really takes you very far. So I think that the toolkit of economics is a very powerful one and I don't think that it's to be discarded with these developments. I think it's going to be complemented with these developments and I think that there is a strong consensus in the profession about that.

CAROL GRAHAM: Quickly let me echo what everybody said that you can't throw out the baby with the bathwater on this one particularly because even though we found a great way to think about things differently and to identify quirks in the way people make choices and all kinds of irrationality, we still I don't think have a lot of questions answered for example about the definition of happiness, how does happiness relate to subjective well-being and all the domains that Alan mentioned, which ones matter more, what definition of happiness do we care about in the policy domain. So it's a new tool, it's great, but it's not ready to replace everything and I think it will always be an important complement and may make us rethink some of our traditional tools.

The point of my question was not that happiness should replace utility. It was that, if as these panelists had noted, adaptiveness in terms of happiness is natural, it's likely that adaptiveness occurs in other elements of the utility function. Utility maximizing behavior in one time period may give way to a more indifferent, "just get by" strategy, in another. My Game Theory prof once defined rational as "strategic"- however, people aren't necessarily strategic. Instead of maxing, they may just satisfy- get just enough. How do we model this? To stick with reasonable premises, I think we have to throw away that whole thing. Looking at how individuals actually behave, with which both the happiness economics and behavorial economics literature helps us, it becomes hard to argue that individuals are maximizing anything. If we do cling to this argument, it's more likely that we are merely defining utility in a way that Krueger appropriately terms "tautological" (and warns against).

The panelists' responses are striking in another way too- they see hope for behavioral economics as a way to tweak the inputs into utility maximization function. It's not that surprising, though, that mainstream economists can be a defensive bunch- they've spent many years learning the maths and plying the trade, and each in this group has achieved significant status by using these sorts of tools (although Krueger was nearly rendered apostate by challenging the notion that a minimum wage will reduce employment, and Graham spent years trying to make the concept of studying happiness credible). Each of their responses referred to these sets of tools, and if we abandon the assumption of utility maximization, it makes the standard models useless, as it introduces untold degrees of heterogenity.

This sort of denial is frustrating to me, because behavioral economics is becoming more accepted in the mainstream and it makes clear that people do not behave in rational or predictable ways. However, making that next leap is difficult because there is an inconvenient consequence of throwing away max u (not just the loss of the "toolkit"). The degree of complexity that removal would introduce would chip away at economics' drive to become more like physics. A recent paper (h/t Economic Logic) discusses this phenomena, pointing out how entire theories can blossom from any one unrealistic assumption:

And much of the economics and finance literature since Foundations has followed Samuelson's lead in attempting to deduce implications from certain postulates such as utility maximization, the absence of arbitrage, or the equalization of supply and demand. In fact, one of the most recent mile- stones in economics—rational expectations—is founded on a single postulate, around which a large and still-growing literature has developed.

The authors rightly criticize the excessive mathematization of economics, and they argue that a large degree of uncertainty should be incorporated into models.

By acknowledging that financial challenges cannot always be resolved with more sophisticated mathematics, and incorporating fear and greed into models and risk-management protocols explicitly rather than assuming them away, we believe that the financial models of the future will be considerably more successful, even if less mathematically elegant and tractable.

So, however troubling or intractable it may be, I think economists need to pull themselves away from the max u assumption. It may result in a complete trashing of their neoclassical model. It may even result in a situation where microfoundations are no longer the basis for our macroeconomic thought. However, being wedded to unrealistic assumptions, falling prey to methodological individualism and methodological utilitarianism doesn't get us anywhere. It preserves the status quo of poor models with poor conclusions that ultimately harm people. There are a number of ways in which economics does this, but let's start by doing away with the most basic methodological one.

Let me hear it- what am I missing here?

"Caveat Emptor Is Not a Business Plan"

Posted: 29 Apr 2010 12:24 AM PDT

Jon Faust responds to Goldman Sachs caveat emptor defense:

Caveat Emptor Is Not a Business Plan, by Jon Faust: The Securities and Exchange Commission case against Goldman Sachs raises the cherished American principle of caveat emptor — let the buyer beware.  The charming story of how this principle came to prominence in American law is remarkably enlightening about recent events.
During the War of 1812, the British blockaded American trade, depressing the price of tobacco stuck inside the United States.  On Christmas Eve 1814, the Treaty of Ghent ended the war. Ships bearing the news were dispatched, arriving in New Orleans on Feb. 15.
That night, news leaked ashore to a tobacco buyer named Organ who dashed to Laidlaw & Company at sunup the next morning hoping to seal a previously discussed deal to buy 111 hogsheads of tobacco.  Presumably surprised by Organ's eagerness, Laidlaw's representative asked if there was any reason for the rush.
Organ apparently dissembled and the deal was done. Almost immediately thereafter, the price of tobacco jumped 30 to 50 percent, and the ensuing lawsuit went to the Supreme Court. (This account is taken from the Supreme Court documents, 15 U.S. 178.)
Writing for the majority, Chief Justice John Marshall ruled that Organ had no obligation to share his information: "The Court is of opinion that he was not bound to communicate it. It would be difficult to circumscribe the contrary doctrine within proper limits…"
What is striking is that caveat emptor arises as a legal principle mainly because of the tangle the courts would get into if they tried to enforce a more ambitious standard of right and wrong.
Chief Justice Marshall's logic surely applies with even greater force to modern deals between investment banks and sophisticated qualified investors, both of which will be simultaneously working on many deals, each involving sensitive proprietary information.
Caveat emptor makes good sense as a practical limitation on what courts might reasonably be expected to sort out. So should shareholders of Goldman Sachs be concerned? About the suit, I don't know. More generally, perhaps so.
As I reminded my undergraduates the other day, caveat emptor is a legal principle, not a business plan.

links for 2010-04-28

Posted: 28 Apr 2010 11:04 PM PDT

The Fed at a Crossroads

Posted: 28 Apr 2010 04:32 PM PDT

Here's the video from The Fed at a Crossroads panel discussion that I said I'd post:

The FOMC Holds the Target Interest Rate "at 0 to 1/4 Percent"

Posted: 28 Apr 2010 03:06 PM PDT

Since, at the moment, I'm listening to Vincent Reinhart talk about when the Fed will tighten in a session entitled The Fed at a Crossroads -- he says rates will stay low for an "extended period" -- I should note that the FOMC announced today that rates will stay low for, again, an extended period. (Reinhart was more specific and said he thinks rates will start to increase late this year or, more likely, early in 2011 -- Update: at the end of the session, he gave May 2011 as the most likely date.)

One side note: Jon Hilsenrath of the WSJ noted that the phrase "extended period" was coined by Reinhart when he was the Director of the Division of Monetary Affairs at the Federal Reserve Board.

[I'll post the video from this session later. Update: Posted here.]

April 28, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

A Loss of Faith in Government

Posted: 28 Apr 2010 03:06 AM PDT

At CBS MoneyWatch:

A Loss of Faith in Government, by Mark Thoma: I'm at the Milken Global Conference, my third, and I've been trying to detect changes in the attitude of participants, changes in the program, etc. relative to the past two years now that we've moved from recession to what appears to be the beginning of a recovery.

One of the biggest changes I've noticed, and this goes beyond the conference, is the attitude toward government. Republicans have always targeted government as inefficient, bloated, a threat to liberty, and so on, but this is different. The criticism and contempt for government is more widespread, and it's gone beyond a party slogan. Even with many accomplishments under its belt, e.g. health care legislation, and even with the perception of moving forward on immigration, financial reform, and climate change legislation, government is still viewed as ineffective, irresponsible, and unresponsive to people's needs. ... [...continue...]...

"Paid Sick Leave Pushed for Low-Income Workers"

Posted: 28 Apr 2010 01:05 AM PDT

The administration supports legislation that grants paid sick leave to "some of nation's lowest-paid employees":

Paid sick leave pushed for low-income workers, by Tony Pugh, McClatchy Newspapers: Fresh off passage of a sweeping health care overhaul, the Obama administration is supporting legislation to provide mandatory paid sick leave for more than 30 million additional workers who are some of nation's lowest-paid employees.
The Healthy Families Act, sponsored by Sen. Christopher Dodd, and Rep. Rosa DeLauro, both Democrats from Connecticut, would require companies that have 15 or more employees to provide one hour of paid sick leave for every 30 hours worked or up to seven sick days a year for a full-time worker.
Both bills — HR 2460/S1152 — are stuck in committee... Top Obama administration officials voiced their support for the federal proposal this week... Groups such as the Institute for Women's Policy Research and the National Partnership for Women and Families say the proposal would provide an overdue measure of economic and workplace justice.
Only 25 percent of low-wage workers have paid sick leave, which makes it a financial hardship for them to get sick and miss work. Those who do stay home to heal or to tend to a family member's illness fear that they could lose their jobs if they miss too many days.
At a briefing Tuesday morning, Terrell McSweeny, domestic policy adviser to Vice President Joe Biden, called the proposal "an issue of middle-class economic security" for struggling families.
Business groups such as the National Federation of Independent Business and the Employment Policies Institute oppose the measure. They say a government mandate on sick leave ... would hurt the very people it's intended to help because employers would offset the cost of the benefit by cutting positions and workers' hours. ...
More than 50 million American workers — nearly 40 percent of the private labor force — don't get paid if they miss work because of illness.
The problem is most pronounced in lower-paying industries such as food service and child care, in which only 27 percent of workers get paid sick leave. A recent report by the Institute for Women's Policy Research estimates that people who came to work while they were sick with the H1N1 virus may have infected 7 million people at the height of the outbreak last year.
After trying to call in sick with the flu several years ago, 23-year-old Megan Sacks of Tacoma, Wash., was told she would have to be "on her deathbed" in order to miss her lunchtime shift as a waitress. After she showed up visibly ill, however, a customer contacted the health department to complain. Sacks ... was ... later fired because her boss thought that she'd called the health officials. "I was really hurt ... because I thought I was a valued employee," she said. "And to this day I still don't know who called the health department. If I knew, I would have asked them not to, because I lost my job over this." ...

One thing that came up in the session The 21st-Century Workplace: Time to Talk About What Works and What Doesn't is that even when workers have the legal right to a benefit like sick leave, very often they are still afraid to use it. Workers won't be able to take full advantage of these types of benefits if the culture within the workplace doesn't change along with the change in the law. Leadership from the administration and others can help to change the workplace culture, and changing the law will help in any case -- see this chart -- but changes to workplace culture won't happen overnight. Employers benefit from the current arrangement and they will resist changes to workplace norms no matter what the law says, and no matter how strongly they are lectured about their moral obligation to their workers.

Solving the Social Sciences' Hard Problems

Posted: 28 Apr 2010 01:04 AM PDT

I'll focus on things related to economics -- there's more in the original:

Solving the Social Sciences' Hard Problems, Harvard Magazine: Across all the disciplines of the social sciences—economics, history, anthropology, political science, sociology, and more—what are the hardest problems that need solving, and which are most worthy of time spent working on a solution?

Scholars from a range of disciplines presented their answers to this question in an April 10 symposium at Harvard. The discussion continues online...

Nicholas Christakis, professor of medical sociology and of medicine at Harvard Medical School and professor of sociology in FAS, argued for further exploration of how the social becomes biological. ...: why, for example, does emotional contagion exist? Why would it provide a selective advantage if, when you meet someone in a foul mood, it poisons your own mood, too? And how can biology account for behavior—which is not genetically determined, although genes may contribute—with findings such as abusive behavior being transmitted through subsequent generations of rats?

Noting that he and collaborators recently published a study showing that altruism spreads through social networks, Christakis said he believes this line of inquiry will also shed light on the origins of goodness. ...

University of California, Berkeley sociology professor Ann Swidler '66 highlighted the question of how societies create institutions, and how they restore missing or damaged ones. The American military's experiences in Iraq and Afghanistan indicate just how little is known about this, she said. Swidler cautioned that any solutions would be tremendously complicated...

Nassim Taleb ... spoke of "the problem of small probability." Taleb ... noted that science—whether lab science or social science—cannot account for extremely rare events such as financial meltdowns. ... "Not only can we not predict rare events," he said, "but we cannot even figure out what role they play in the data." That is because "you don't measure risk like you measure a table," he said: risk cannot be quantified in a precise way. This problem may not be solvable, Taleb acknowledged; the most to hope for, he said, may be to define its boundaries. ...

Oxford University philosopher Nick Bostrom challenged the academic community to identify the biggest fallacies that are accepted as common knowledge today, and highlighted past misconceptions that were once universally believed... "Not all progress consists of going forward," said Bostrom. "Sometimes if we've taken a wrong turn, what we need to do is turn back."

Weatherhead University Professor Gary King, who directs Harvard's Institute for Quantitative Social Science, posed a methodological problem: "post-treatment bias in big social-science questions." Post-treatment bias happens when researchers, in attempting to control for variables that may skew the results of a study, inadvertently control for a variable that is directly related to the outcome they wish to measure, yielding erroneous results.

King gave the example of a company accused of paying black employees less than white employees. When studying whether the accusation is true, a researcher's natural instinct would be to control for position within the firm, so that the question being asked is whether employees are getting equal pay for equal work. But if 99 percent of employees in the mailroom are black, and 99 percent of employees in upper management are white, it might not matter that all the mailroom employees are paid at the same rate ... and all the high-level managers are paid at the same rate.... "If you control for position in the firm," said King, then you'll find that race has "no effect on salary—and then this racist firm gets to say, 'Hey, no problem!' " King highlighted ... pressing real-world questions for which post-treatment bias stands in the way of finding answers...

Emily Oster '02, Ph.D. '06, focused on behavior change in health. Massive increases in life expectancy during the twentieth century resulted from advances in sanitation, technology, and medicine; in the twenty-first century, she said, they will depend on getting people to change their behavior—an infinitely trickier task.

Oster ... noted that newly diagnosed diabetics who are very obese gain more weight, in the year following their diagnosis, than similarly sized people who are not diabetic—contrary to what one might expect... In addition, she noted, only 60 percent of diabetics who are prescribed medication take it as directed.

Over and over, when economics and public-health researchers ask, "Do people do good things for their health if they're very easy?" the answer turns out to be no...

Lee professor of economics Claudia Goldin called for further research on the persistent problem of why women are paid less than men are, and how to level the playing field. Her own research has shown that most or all of this bias is unintentional: women self-select into fields that pay less. ...

Beren professor of economics Roland Fryer drew attention to another persistent problem in American society: the racial achievement gap in education. This gap, he said, underlies numerous other social problems: racial differences in the incarceration rate, employment, wages, and health. ...

Although each presenter supposedly outlined what he or she saw as the most pressing problems in the social sciences today, an audience inquiry about what other questions the panel would have raised, having heard each other's contributions, prompted the formation of a whole new list.

"I'm glad that we were given this opportunity," Goldin responded, "because when we were asked to come up with a hard problem in the social sciences, I think all of us thought very hard about it, and we came up with a bunch of hard problems. But when we had to create something for the audience, we realized that we had to come up with something that we actually knew something about, so then we threw away that hard problem and we took our research."

She added that the problem she really wanted to talk about was how and why social norms change. Other presenters added these problems to the mix:

  • the problem of emergence: "How do you get the mind out of a bunch of neurons? How do you get a political system or an economic system out of a bunch of individual people?" (Kosslyn)
  • the role for genetics in thinking about social-science problems (Oster)
  • how, in general, to jump from breakthroughs on small problems to progress on big problems: "We're better at biology than behavior." Obesity, from a biologist's point of view, is "totally solved," said King—people just need to exercise more and eat less. But as Oster noted, getting people to do these things is easier said than done, and so from the point of view of economics and psychology, the problem is "not solved at all."
  • how to square the realization that people don't always behave rationally with the need to avoid paternalism and let people make their own decisions even when they choose an outcome that isn't good for them (Zeckhauser)
  • trying to understand ideologies—"the beliefs we have that we're willing to die for" (Carey)
  • the "translational gap"—the gap between advances in knowledge and their implementation. "You go to business school and take a class in finance, and they teach you theory that we know doesn't work, that we have known doesn't work now for 25 years," said Taleb. But "people still teach it today."
  • how to explain "small outbursts of creativity and achievement": such Renaissance Florence, the Scottish Enlightenment, Silicon Valley. "What enabled small populations to achieve disproportionately for a period of time?" Bostrom asked. "Is that something we could learn to recreate deliberately?"
  • the evolutionary origin of overconfidence. Citing a study that showed that 94 percent of academics think their work was above average, Fowler said, "We have this 'Lake Wobegon effect' that really interests me."
  • developing better models of what culture is and how it works. "It's really important to remember," said Swidler, "that you cannot derive the properties of a complex arrangement from the properties of the individual pieces."
  • the question of where tastes come from. "If your tastes come from the people around you," asked Christakis, "where do their tastes come from? Maybe all of a sudden one person wants something for a chance reason, and it just ripples through the network."

To read more about the symposium, see accounts from the Harvard Crimson, the opinion pages of the Wall Street Journal, and on the HarvardScience and Alumni Affairs & Development websites.

links for 2010-04-27

Posted: 27 Apr 2010 11:04 PM PDT

Do Our Financial Models Still Work?

Posted: 27 Apr 2010 05:58 PM PDT

Do Our Financial Models Still Work?

  • Aaron Brown, Risk Manager, AQR Capital Management; Author, The Poker Face of Wall Street and A World of Chance
  • Colin Camerer, Robert Kirby Professor of Behavioral Finance and Economics, California Institute of Technology
  • Stacy-Marie Ishmael, Reporter, Financial Times
  • Myron Scholes, Nobel Laureate, 1997; Chairman, Platinum Grove Asset Management
  • Bruce Tuckman, Director of Financial Markets Research, Center for Financial Stability

Moderator: Glenn Yago, Executive Director, Financial Research, Milken Institute

Update: See also:

What's Wrong with Risk Models, by John Cassidy: First up, sincere apologies to the organizers and attendees of the Milken Global Forum, in Los Angeles, where I was due to appear this afternoon at a session about economic models of risk. I was looking forward to engaging the other panelists, who included Nobel laureate Myron Scholes, of "Black Scholes" fame; Colin Camerer, a Cal-Tech behavioral economist I've written about in the past; and Aaron Brown, a former Wall Street risk modeler. Unfortunately, my early morning flight from Ottawa, Canada, where I had another speaking engagement last night, was canceled...

Anyway, here is roughly what I would have said ...

The Goldman Hearings

Posted: 27 Apr 2010 03:15 PM PDT

Since I'm at a conference, I haven't been able to pay as much attention as I'd like to the Goldman subcommittee hearings being held today in the Senate. Here are a couple of reports:

Goldman Sachs on trial, by Andrew Leonard: Fans and detractors of Goldman Sachs agree on at least one point: The investment bank employs the smartest traders on Wall Street. The best risk managers, the most deadly sharks, the crème de la crème. But at the start of a full day of congressional hearings featuring Goldman Sachs executives, past and present, Sen. Carl Levin, chairman of the Senate's Permanent Subcommittee on Investigations, made Daniel Sparks, Goldman's former head of mortgage trading, look pretty dumb.
The first panel featured four Goldman executives at the heart of Goldman's structured finance division, including Fabrice Tourre, the trader who is the focus of the SEC's allegations of securities fraud against the investment bank. It would not be an exaggeration to describe these four men as the belly of the structured finance beast...
Levin's first question, directed at Sparks, concerned Goldman's efforts to sell to clients a security that referenced mortgage loans originated by New Century Finance -- one of the most notoriously reckless subprime lenders. The loans were terrible, and Goldman knew that they were terrible -- Goldman was hedging its own risk by betting that the security would decline in value.
One of Goldman's clients asked via e-mail, "How do you get comfortable with the collateral behind those securities?" Meaning, basically: Those loans are crap, how in the world can you possibly be comfortable pushing this deal?
Levin wanted to know whether Sparks thought Goldman had a responsibility to tell its client that it was "getting comfortable" by selling the security short, by betting against it. In other words, did Goldman have a responsibility to tell its client that Goldman's own opinion was that the security was likely a bad investment?
And Daniel Sparks simply would not answer the question. ... But a relentless Levin kept pressing the point, which boiled down to something very simple: Did Goldman have a responsibility to its client to indicate its own evaluation of the securities it was pushing?
Susan Collins, the ranking Republican present on the committee, followed up with an even more direct question: "Do you have a responsibility to act in the best interest of your client?" Seems like a simple enough question, but Sparks could not answer it either, saying only, after much pressure: "I believe we have a duty to serve our clients."
Right then and there, Goldman Sachs lost any chance it had of making a positive case to the American public. Right then and there, Goldman Sachs declared to all who were watching that its vaunted dedication to the interests of its clients was just so much hot air.
Goldman's defenders, if you can find them, will say that Goldman's responsibility was just to broker deals, to be a "market maker." If a sophisticated investor wanted to get on the side of a deal that Goldman was betting against, that's OK. ...
That may well be a legally defensible position. But the reality is that most Americans do not understand the definition of "serving your client" to include "pushing your client to invest in a 'shitty deal'" (as one Goldman exec characterized a deal zeroed in on by Levin) on their clients. And that's what Goldman was doing.
Wall Street was, in fact, a factory for turning shitty deals into profit. Goldman was the best in the business, but it was a very, very bad business.

And, one more:

Goldman Sachs execs still don't get it, by Barbara Kiviat: Today's Goldman Sachs hearing in the Senate is fantastic theater. The kind of theater that makes you want to run to the restroom to vomit.

I've been watching the hearing on TV, and I am nauseated to report that they still don't get it. The world came to the brink of financial ruin, and the people driving the mortgage securities death-machine still can only look back and say that at the time it all made sense. To say that the Goldman Sachs executives testifying lack introspection is like saying that the Black Death was a minor health scare.

Consider the following exchange between Senator Ted Kaufman and Daniel Sparks, who ran Goldman's mortgage division from late 2006 until mid-2008. Kaufman wanted to know about stated-income loans—mortgages in which borrowers don't have to prove they make the amount of money they claim to. These loans, which may make sense for rich people with variable income (an entrepreneur, say), came to be sold to all stripes of borrower, including many with subprime credit. Kaufman remarked on one securitization in which 90% of the loans were stated-income. ...

Kaufman went on to detail how Goldman didn't just securitize some stated-income loans, but a lot of them. ... Kaufman then launched into a tirade about how, if the witnesses in front of him were to be believed, the United States had suffered some great natural disaster—an event that had been in no way been man's doing. It was if the financial crisis was something that just kind of happened to us.

I am equally as appalled. ...

Time and again at today's hearing, Goldman executives refused to admit, even in retrospect, that they had crossed a line. Time and again at today's hearing, they defended their actions by saying that they were rightly responding to market demand—as if responding to market demand somehow absolves one of the responsibility to use human judgment. ...

[T]he people who work at Goldman Sachs are terribly smart, and it would be helpful to have them seriously thinking about what went wrong and how we might better manage the financial ecosystem in order to avoid meltdowns in the future. Instead, they seem to be using all their energy to circle the wagons. Senator Kaufman's question about stated-income loans was open-ended and non-confrontational. What might that exchange have looked like if Sparks had started with, "You know, stated-income loans are great for some people, but not for others. In the bubble, they went to the wrong people. It's a good question—how do you design products so that they're not misused?"

What really frightens me in all of this is that it didn't seem like a legal or PR strategy. It seemed like these Goldman executives genuinely had no ability to take a step back and make observations about the system in which they operate. It seemed like they had been so thoroughly inculcated in the culture of high finance that it was literally impossible for them to do the thing intelligent people are supposed to be able to do in the wake of a systemic breakdown—re-evaluate the assumptions that went into building that system.

Perhaps I was expecting too much out of my fellow human beings. ... I just thought—especially after hearing that the Goldman executives agreed to testify without being subpoenaed—that we might learn something useful in these hearings. That we might actually gain some insight instead of just another reason to want to bring these people down a peg.

I was wrong.

Any other reactions???

Update: See also Pete Davis and James Surowiecki.

Republicans Block Debate on Financial Reform, Reid will Try Again

Posted: 27 Apr 2010 11:47 AM PDT

After the failed attempt to begin debate on financial reform -- the Democrats couldn't get the 60 votes they need -- Harry Reid is going to try again later today. The result is not likely to be any different, the game here is to generate negative headlines for the GOP and, hopefully, get them to back down on their opposition. If today's vote fails, another vote is being set up for Wednesday.

I'm not sure who will win this battle, or that it will do much to rein in the financial industry if reform does pass in its current form, but it's hard to imagine the Republicans looking good on this one.

April 27, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

"Deficit Reduction: Argument by Authority"

Posted: 27 Apr 2010 12:42 AM PDT

I don't agree with every word of this argument by Dean Baker, particularly some of the parts about the bias in the CPI, but I do agree with the main thrust:

Deficit reduction: argument by authority, by Dean Baker, CIF: The deficit hawks are going into high gear with their drive to cut social security and Medicare. President Obama's deficit commission is having a big public event on Tuesday in which many of the country's most prominent deficit hawks will tout the need to reduce the budget deficit. The next day, Wall Street investment banker Peter Peterson will be hosting a "summit on fiscal responsibility", which will feature more luminaries touting the need to get deficits under control.
What will be missing from both of these events is any serious debate on the extent of the deficit problem and its causes. These affairs are not about promoting a real exchange of views on issues like the future of social security, Medicare, and public support for education, research and infrastructure, the purpose of these events is to tell the public that everyone agrees, we have to cut the deficit. And, this means cutting social security and Medicare. This is argument by authority.
Many public debates in the United States take this form. The issue is not what is said, but rather who says it. A few years ago all the authorities said that there was no housing bubble. The large body of evidence showing that house prices had hugely diverged from the fundamentals did not matter...
Going further back to the mid-90s, many of this same group of deficit hawk luminaries tried to use argument by authority to cut social security. They came up with the story that the consumer price index (CPI) overstated the true rate of inflation. ... This crew (which included then Senator Alan Simpson, a co-chair of President Obama's commission, and Peter Peterson) argued that social security benefits should lag the CPI by one percentage point a year. In other words, if the CPI shows 3% inflation, then social security benefits will only rise by 2%.

That may seem a small cut, but it adds up over time. A worker retired for 10 years would have their benefits reduced by approximately 10%. A worker retired for 20 years would have their benefits cut by almost 20%.
To push this agenda, they put together a panel of the country's most prominent economists, all of whom blessed the claim that the CPI overstated the true rate of inflation... In addition to this panel, the social security cutters also pulled in other prominent economists, including Martin Feldstein...
The social security cutters were so successful in rounding up the big names that virtually no economists were prepared to publicly stand up and question their claims about the CPI. They had near free rein, running around the country with the "all the experts agree" line.
As events unfolded they were not able to get their cut in social security benefits. (Ted Kennedy and Dick Gephardt deserve big credit on this.) But what is really interesting for the current debate is what happened to the experts' claim on the CPI. There were some changes made to the CPI, but in the view of the expert panel, the major causes of the biases in the CPI were not fixed. They concluded that even after the changes the CPI still overstated the true rate of inflation by 0.8 percentage points annually.

If this claim is really true then it has enormous ramifications for our assessment of the economy. It means, for example, that incomes and wages are rising far more rapidly than the official data show. It means that people in the recent past were far poorer than is indicated by official statistics. If the claim about the CPI being overstated is true, then we would have to re-examine a vast amount of economic research that starts from the premise that the CPI is an accurate measure of inflation.
However, almost no economists have adjusted their research for a CPI's overstatement of inflation. In fact, even the members of the expert panel don't generally use a measure of inflation that adjusts for the alleged bias in the CPI. In other words, when they are not pushing cuts to social security, these economists act as though the CPI is an accurate measure of the rate of inflation. This could lead one to question these experts' integrity.
This history should give the public serious grounds for being suspicious about the latest efforts to cut social security and Medicare. A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit problem is really a problem of a broken US healthcare system. The public should not allow the deficit hawks to derail a more serious discussion with their argument by authority.

I suppose I should explain what it is I disagree with. First, the second to last paragraph doesn't make the case Dean Baker claims it makes. If the bias in the CPI is a constant .8 percent, then regressions involving this variable will still have unbiased slope coefficients -- the bias will be picked up by the constant term. (That is, suppose that a thermometer is off by four degrees. It will still tell you how many degrees the temperature has changed, e.g. that the temperature went up by ten degrees, and it will do so accurately, but it won't get the actual temperature right. Since the change in temperature determines the slope coefficient in a regression, and the change in temperature is correct, the slope coefficient will be measured accurately.) Since we are almost always interested in the slope term which is unbiased, and only rarely care about the estimates of the constant, the bias in the slope coefficient is is not generally a problem. The main point is that the use of a biased inflation measure in empirical work does not necessarily lead to questions about the integrity of the researchers. (If the bias varies with the "temperature", then the slope coefficient will also be biased, but the claim is a constant bias of .8%).

Second, on the more general question of whether a bias exists at all, I'll refer you to this post by Brad DeLong, "The Meaning of CPI Bias."

Finally, I am not taking issue with the basic claim that the deficit hawks are trying to take control of the debate and push it in a particular direction, a direction that has social programs in its sights. So let me repeat that "A serious discussion of the deficit will show that in the short-term the deficit is not a problem and that the longer-term deficit problem is really a problem of a broken US healthcare system. The public should not allow the deficit hawks to derail a more serious discussion..."

"Emerging Technologies, Global Strategies"

Posted: 27 Apr 2010 12:33 AM PDT

At this session yesterday, Michael Gough (on behalf of Adobe) and Hal Varian (on behalf of Google) identified similar strategies that the two companies have adopted to try to maintain the hunger that drives innovation. The problem is the complacency that sets in after a company has grown and attained some success. Both said that they try to set up smaller units external to the company to compete with "the mothership". Apparently, the smaller units -- often in other countries -- are very anxious to show up the hotshots at the main company and will work very, very hard to show that they can do it better. And they often do.

Nothing earth shattering, I just found it interesting.

Here's the video (the above is just a small part of the session):

"Donors’ Three Mistakes in Fragile States"

Posted: 27 Apr 2010 12:24 AM PDT

Chris Blattman argues that we can't expect too much from countries in need of aid:

Donors' three mistakes in fragile states, by Chris Blattman: You're the Finance Minister in a country just coming out of conflict. Or maybe you're disaster-struck like Haiti. Donors line up and make big pledges. UN agencies arrive and occupy whole blocks of office buildings. Each come in with a template. It looks reasonable. It's certainly well-intentioned.
None of you know it yet, but you're setting yourself up to fail ... with three mistakes donors will probably make.
1. Let's set high standards for governing and disbursing public money. Bad idea. Bureaucracies need procedures, norms and experienced personnel. If a Mozambique or Liberia improves its bureaucracy at the fastest rate in human history, it will have the sophistication of an India or Pakistan in 20 years.
2. Invest quickly in education, health and infrastructure. Actually, these aren't the country's first priority. Law, order and security come first. Unfortunately, freedom from violence, or access to justice, are not MDGs [Millennium Development Goals]. Your donors are focused (and evaluated) on human development and poverty alleviation. That's also what they know how to do best. Security sector reform and justice? Less so.
3. Get NGOs to deliver aid directly. Since the state bureaucracy can't meet high standards, you can forget direct budget support. But how to build schools and clinics and roads? Enter the NGOs and contractors. Unfortunately, this direct delivery is not going to help you build bureaucratic capability. It might even undermine it.
So what's the solution?
Set goals for the rate of bureaucratic improvement, not the level of standards. In the meantime, this or that Deputy Minister is going to need to send pork to his constituents. And money is going to get mismanaged or diverted.
Keep education and poverty on the table, but make certain that law and order are first not fourth on the agenda. ...
Finally, in place of direct aid, there's a nice new trick: community-driven development. Rich countries give the state a big pot of money, then the state defines simple local procedures for disbursement. The donors love it: it sounds all participatory and pro-poor (and often it is). But most of all, it lets a weak state actually disburse cash without a ridiculous amount of accounting, with lots of room for pork and (diminishing over time) diversion of funds to ruling party coffers.
The short story: shoot for the possible, not the impossible.

links for 2010-04-26

Posted: 26 Apr 2010 11:03 PM PDT

Is Market Fundamentalism the Easier Argument?

Posted: 26 Apr 2010 12:15 PM PDT

This is probably a "grass is greener on the other side" argument, but when I listen to market fundamentalists argue for their side, as many have so far today in the sessions I've attended at the Milken Global Conference, I get envious. It's such an easy argument to make. No matter what the problem, the solution -- though stated in many, many creative ways -- is always the same. Get government out of the way and let markets do their magic. A tax cut, a reduction in government spending, or easing of regulation will always make things better, not worse. And if there are problems in markets, they can always be blamed on government. Even when fundamentalists admit there is a market failure because it cannot be denied, they can (and do) argue that the government will still make things worse if it intervenes. Thus, no matter the problem, there is always a simple explanation and a simple solution. When you argue for government intervention, the job is much harder. You have to identify the specific market failure, argue that it's significant enough to justify government intervention, come up with a policy that will address the particular failure without making other things worse, and then argue that the political process won't mangle the policy so badly as to make it worthless or counterproductive.

I don't have a problem with the baseline assumption being that we should leave markets alone unless it can be demonstrated that significant problems exist, and that there's a chance of making things better, but the deck does seem to be stacked against the interventionist position.

Jobs, Jobs, Jobs

Posted: 26 Apr 2010 09:54 AM PDT

I'm at the Jobs, Jobs, Jobs session at the Milken Global Conference. As much as I'd like to comment, my daughter is the Press Secretary for one of the participants -- Carly Fiorina, Republican candidate for Senate in California -- so I am going to skip commenting on this one (she was not responsible for the sheep video, or the Passover email).

Uh Oh -- They're Back

Posted: 26 Apr 2010 08:28 AM PDT

Interesting. The opening session at the Milken Global Conference -- Q&A from the moderator -- turned almost immediately to whining about government regulation and how it will go overboard and kill the economy (Steve Forbes and Ken Griffen in particular, Mohamed El-Erian is being a bit more reasonable). They are complaining about both financial regulation and coming climate change regulation, and how it's all part of the administration's agenda to increase the size and scope of government.

It's pretty clear that the first order of business is to block as much regulation as possible, and then, if it happens anyway, to do everything possible to overturn any new regulatory initiatives. It also seems pretty clear that ths group still has a relatively high opinion of the importance of financial innovation as a key source of economic growth, and seem to have forgotten all about the risks such innovation poses for the economy.

So my first impression of the conference is that unlike last year when many (though not all) financial leaders seemed to have their tails between their legs and in retreat, the attitude seems to be we're back! and the first order of business is to prevent government from getting in the way. Thus, while there's quite a bit of sentiment presently to impose more regulation on banks, it's not clear that once all is said and done the new regulation will go anywhere near as far as needed. It's also not clear that any new regulation that is put into place will survive the movement to overturn it that will surely come in the next few years. But perhaps being here with people mostly from the financial industry gives me a biased and pessimistic outlook on the future of regulation. I sure hope so.