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August 18, 2011

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Posted: 17 Aug 2011 10:01 PM PDT

Sachs: The Great Failure of Globalization

Posted: 17 Aug 2011 06:12 PM PDT

Jeff Sachs:

The great failure of globalization, by Jeffrey Sachs, Commentary, Financial Times: ...I've watched dozens of financial crises up close... Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalization.
Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. ... The path to recovery now lies ... in ... upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. ...
The simple fact is that globalization has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile..., they have been able to convince their home governments to cut tax rates ... in the name of global tax competition. ... In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world.
An improved fiscal policy in the transatlantic economies would therefore be based on three realities. First, it would expand investments in human and infrastructure capital. Second, it would cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen. Third, it would balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens. ...
Export-led growth is the other under-explored channel of recovery. Part of this must be earned through better skills and technologies – another reason not to cut education. ...
Sadly, these global economic currents will continue to claim jobs and drain capital until there is a revival of bold, concerted leadership. ...

Merkel and Sarkozy are Right about a Tobin Tax

Posted: 17 Aug 2011 12:06 PM PDT

Here are a few comments at Reuters on the news that Nicolas Sarkozy and Angela Merkel may propose a financial transactions tax in September:

Merkel and Sarkozy are right about a Tobin tax

Richard Green: I am a Big Fan of Stein's work

Posted: 17 Aug 2011 11:34 AM PDT

Richard Green says I should support Jeremy Stein's appointment to the FOMC (this also gives me a chance to note that Richard Clarida has removed himself from consideration):

Jeremy Stein for Fed Governor, by Richard Green: Mark Thoma writes that the administration is considering nominating Richard Clarida and Jeremy Stein for the Federal Reserver Board. He cites an encouraging Clarida speech, but writes, "I know less about Stein, so I'll withhold judgment for the moment."

Personally, I am a big fan of Stein's work. The shortest way to explain why is to list the titles of his five most cited papers:

  • Herd Behavior and Investment
  • A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
  • Rick Management: Coordinating Investment and Financing Policies
  • Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
  • Internal Capital Markets and the Competition for Corporate Resources.
Stein has spent his career trying to figure out how capital markets really work instead of pledging fealty to models that don't work very well. I can't think of a better intellectual qualification for a Federal Reserve Board member.

I have done a bit of reading since, and I agree.

Thinking of the Fed's recent commitment to keep interest rates low though mid-2013, the membership rotates among the regional Feds every January. Will changes in the composition of the committee make any difference? If you look at the composition of the FOMC next year (it changes every January), not much will change. Presently the regional bank representation is (ignoring New York since it doesn't change, the D, N, SH, and H designations stand for dove, neutral, soft-hawk, and hawk, and are taken from here):

Chicago - Evans (D)
Philadelphia - Plosser (H)
Dallas - Fisher (H)
Minneapolis - Kocherlakota (SH)

Come January it will change to:

Cleveland - Pianalto (N)
Richmond - Lacker (H)
Atlanta - Lockhart (SH)
San Francisco - Williams (D)

Most of these are a wash:

Williams for Evans (D for D)
Lacker for Fisher (H for H)
Lockhart for Kocherlakota (SH for SH)
Pianalto for Plosser (N for H)

Pianalto for Plosser should tilt the Committee a bit toward easing, but for the most part the hawkishness/dovishness of the FOMC won't change all that much. Thus, if the committee is going to change noticeably any time soon, it will have to come from new appointments rather than the rotation of the regional Fed presidents. But with new appointments all but blocked, especially those that would lean toward dovishness, that's unlikely.

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