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December 29, 2011

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Latest Posts from Economist's View


"Desperate for Work or Fearful about Losing Their Job"

Posted: 29 Dec 2011 01:35 AM PST

Dean Baker:

The Daily Beast Acts Up on the Economy, by Dean Baker: ...The unemployment rate for the year [2011] is likely to average above 9.0 percent. The number of people who are involuntarily underemployed has generally been 8.5 and 9.0 million, close to double the pre-recession level. Millions more have given up looking for work altogether. Real wages have been stagnant or falling for the last 4 years, with little prospect of turning around any time soon as the high rate of unemployment continues to depress wages.
In addition, tens of millions of baby boomers are approaching retirement with almost nothing to support themselves other than their Social Security. According to a recent study by the Pew Research Center, the median older baby boomer (ages 55-64) had just $162,000 in wealth. This is roughly enough to buy the median home. This means that if this household took all of their wealth, they can pay off their mortgage. They would then be completely dependent on their Social Security to support them in retirement. And, half of older baby boomers have less wealth than this.
In short, most of the country is looking at a situation where they are desperate for work or fearful about losing their job. Older workers are looking at a retirement where they are not far above the poverty level, even after spending a life working in middle class jobs. ...

Then we should surely impose austerity immediately to make the jobs picture even worse, and focus it on social insurance programs for older workers looking forward to a retirement near the poverty level. Asking those who are far, far from poverty to help, and waiting until the economy is on solid footing before taking steps to address long-run budget issues is, of course, out of the question.

Links for 2011-12-29

Posted: 29 Dec 2011 12:06 AM PST

Obama-Clinton?

Posted: 28 Dec 2011 12:53 PM PST

Robert Reich argues it will be Obama-Clinton in 2012. Seems unlikely to me.

Feldstein: France Should Quit "Lashing Out at Britain"

Posted: 28 Dec 2011 11:07 AM PST

Martin Feldstein says The French Don't Get It:

The French government just doesn't seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries.
French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain. The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain. The finance minister, Francois Baroin, recently declared that, "You'd rather be French than British in economic terms." And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.
French officials apparently don't recognize the importance of the fact that Britain ... has its own currency, which means that there is no risk that Britain will default on its debt. When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations. By contrast,... the French central bank cannot create euros. ... That is why the market treats French bonds as riskier and demands a higher interest rate...
There is a second reason why the British situation is less risky than that of France. Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency. Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels. ...
France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain...

"The Proposition is Not Mainstream in the Sense of Being Fully Accepted by Most Economists"

Posted: 28 Dec 2011 10:58 AM PST

I haven't said much about the (most recent) recent flare up over Ricardian equivalence. Why? The answer's simple, the empirical evidence does not support it. Why argue about something when we already know it fails to adequately explain the data? Making the Ricardian equivalence assumption might be okay as a first approximation for some questions -- though I'd argue that it mostly isn't -- but in any case the theory does not adequately capture economic behavior.

But let me turn the microphone over to one of the architects of the modern version of the theory, Robert Barro. In the following interview with the Minneapolis Fed (from 2005), Barro emphasizes the point Krugman makes here, i.e. that Ricardian equivalence says nothing about the effectiveness of fiscal policy as a stimulus for the economy (a point that IS worth noting since this point is often confused in discussion of this topic. As Barro tries to make clear, "It's never part of Ricardian equivalence that the level of government expenditure doesn't matter.":

Region: The Ricardian equivalence hypothesis, which you brought to prominence in 1974, might be taken to suggest that deficit spending isn't inherently harmful since rational people, expecting to pay higher taxes in the future to pay off government debt, will save more, so private savings will balance out the public deficit.
Does that imply that concerns about "irresponsible" levels of debt are unfounded? And is it puzzling to you that the Ricardian equivalence hypothesis isn't a mainstream belief in macroeconomics?
Barro: Let me say first that I think the Ricardian equivalence idea is basically right as a first-order proposition. However, people get confused as to exactly what it says. Before I say what that is, I should mention that, although the proposition is not mainstream in the sense of being fully accepted by most economists, the idea has had tremendous influence on the way economists think about this issue.
Analysis often begins with Ricardian equivalence as a first-order proposition and then goes on to investigate why there are deviations from precise equivalence. Thus, like the Modigliani-Miller theorem on corporate finance, Ricardian equivalence has become a common starting point for the way people think about budget deficits. This situation is vastly different from what it was before the mid 1970s.
To illustrate the potential pitfalls in what Ricardian equivalence says and does not say, one can consider the famous quote attributed to Vice President Cheney to the effect that President Reagan proved that budget deficits don't matter. The Cheney quote is often interpreted to mean that the level of government expenditure does not matter, and that surely is not what Ricardian equivalence says. The Ricardian proposition is about the consequences of paying for a given amount of public expenditure in different ways. Specifically, does it matter—or does it matter a lot—whether the government pays for its spending with current taxes or with current borrowing, which entails higher future taxes?
So, a central part of the proposition is that the amount of public expenditure—today and tomorrow—is being held constant. It's never part of Ricardian equivalence that the level of government expenditure doesn't matter. As [University of Chicago economist] Milton Friedman put it, the costs or benefits of government outlays depend on the amount and nature of what the government spends—there is no free lunch about paying for that spending. So whether you pay for it now or later is secondary.
As a first-order proposition, it is right that it matters little whether you pay for government spending with taxes today or taxes tomorrow...

[For a more academic discussion of this topic, see this discussion from David Romer's graduate macro text. Romer explains (contra Barro) why ""there is little reason to expect Ricardian equivalence to provide a good first approximation in practice."]

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