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January 4, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Contrary to Republican Claims, Democrats are Not Anti-Market

Posted: 04 Jan 2012 12:33 AM PST

New column: Republicans charge Democrats with advocating socialist, anti-market policies, but Democrats would do a better job of allowing markets to reach their full potential than Republicans:

GOP Throws Low Blows at Dems over Free Markets

Markets work best when government adopts an active rather than a passive stance.

Fed Watch: Still Cautious Heading Into 2012

Posted: 04 Jan 2012 12:24 AM PST

Tim Duy:

Still Cautious Heading Into 2012, by Tim Duy: I have been hesitant to embrace the recent positive data flow - once bitten, twice shy perhaps. Something about the current dynamics that seems a little too familiar. Indeed, I felt something of relief when FT Alphaville came to a similar conclusion in the waning days of 2011. Cardiff Garcia reports on a Nomura research note that details a new bias in the seasonal adjustment process, noting:

Up next, writes Nomura, you can expect exaggeratedly strong readings from the Chicago PMI later this month and the next ISM manufacturing survey at the start of January.

I imagine it is premature to call the readings "exaggerated," but both did surprise on the upside, as much data has of late. Read the whole piece - it is worth the time.

Indeed, flirtations with either excessive optimism or excessive pessimism were not richly rewarded last year, as on average the economy simply edged upward in pretty unremarkable fashion:


It seems reasonable to expect the same in 2012, at least as a baseline - a slow "recovery" that is really more of an adjustment to what appears to be the economy's new equilibrium path, one that is decisively subpar to the pre-recession trend. I don't believe that such an adjustment is necessary, as in my view it simply reflects a shortfall of aggregate demand. That said, the longer the cyclical downturn grinds on, the more likely it is that we will indeed see a new equilibrium path. A greater percentage of the cyclical unemployment will become structural unemployment or permanent shifts in the labor force participation rate. In addition, investments will go unmade as firms hoard cash. And, increasingly, policymakers will manage policy along the new equilibrium path, forgetting entirely the pre-recession path.

More than not, this is already the case. To be sure, some FOMC members are moving toward QE3, setting the stage for additional asset purchases, perhaps in the spring now that inflation concerns have eased somewhat. Still, the pace of policy change is agonizingly slow. From the most recent minutes:

A number of members indicated that current and prospective economic conditions could well warrant additional policy accommodation, but they believed that any additional actions would be more effective if accompanied by enhanced communication about the Committee's longer-run economic goals and policy framework. A few others continued to judge that maintaining the current degree of policy accommodation beyond the near term would likely be inappropriate given their outlook for economic activity and inflation, or questioned the efficacy of additional monetary policy actions in light of the nonmonetary headwinds restraining the recovery. For this meeting, almost all members were willing to support maintaining the existing policy stance while emphasizing the importance of carefully monitoring economic developments given the uncertainties and risks attending the outlook. One member preferred to undertake additional accommodation at this meeting and dissented from the policy decision.

"Could well" warrant, but might not. Other than Chicago Federal Reserve President Charles Evans, FOMC members have been hesitant to act further despite the gaping and persistent output gap. It would seem that they are more willing to manage the economy along it current path, allowing unemployment to slowly decrease gradually - job gains or labor market exodus - rather than risk another percentage point of inflation. And with the PCE price index essentially now returned to pre-recession trend, there has been little enthusiasm to embrace such a risk:

But again only Evans appears willing to accept higher inflation. Perhaps policy change will accelerate now that Presidents Kocherlakota, Fisher, and Plosser are rotated off the FOMC, but note that this was always a minority block. Had the majority wished to advance policy more aggressively, they could have. The majority simply was not motivated enough to fight such a battle. And while they would act should the economy falter, that action will be delayed if the incoming data once again reflects Nomora's upward seasonal bias, regardless of the underlying trend.
In short, while the FOMC has been edging toward additional action - and will likely do something after first enhancing communication procedures with additional rate forecast - they have not done so with the urgency called for by the anemic recovery.
While a repeat of last year is a reasonable baseline, I remain more concerned with downside rather than upside risks. Europe is still on the ropes, in my opinion. The ECB has bought some time with its LTRO, but the still high yields on long-term Italian debt suggest that that southern European nation is suffering from something closer to a solvency crisis than a liquidity crisis. And the austerity push is far from over, as, unsurprisingly, peripheral European nations will continue to miss budget targets, with Spain being the latest example. In my view, the European periphery will have trouble breaking the debt-deflation dynamic in the absence of currency devaluation. Such devaluation is a key mechanism to resolving balance of payments crisis, allowing for a rapid increase in competitiveness and stoking inflation that reduces the real burden of domestic-denominated debt. No such option is available to European nations, locked in as they are to the Euro. Consequently, I see 2012 as another year of challenge as Europe struggles to hold the Euro together by pressuring troubled nations into ever-greater austerity.
In addition to Europe, I remain concerned that US politics will usher in an ill-timed fiscal contraction. The payroll tax credit was extended for just another two months, and Stan Collender is warning that there may not be an easy path to an extension. And I continue to think that spending would be vulnerable to any sudden hit to income, especially when disposable personal income isn't exactly surging forward:
Finally, the festering Iran situation is a wildcard, with posturing by both the US and Iran looking increasingly like a game of chicken, and both sides looking to provoke the other into a rash action. Of course, if any escalation of hostilities triggers an actual supply disruption that spikes oil back to $150 or higher, we would expect the global economy to lurch downward. Note, however, this is a perennial concern, and one that will not fade until we find an alternative to fossil fuels. Something we simply learn to live with, it seems.
Bottom Line: I want to believe the recent improvement in the tenor of economic data signals that activity is set to accelerate substantially in 2012. But the ups and downs on the past two years smoothed out to nothing exciting or catastrophic, just a moderate path of activity that remains woefully insufficient to return the US economy to its pre-recession trend. For now, I will stick to that middle ground, while remaining watchful of the all-too-many downside risks that leave me just a little bit sleepless each night.

Links for 2012-01-04

Posted: 04 Jan 2012 12:06 AM PST

"An Elegant Core of Sensible Ideas"

Posted: 03 Jan 2012 03:28 PM PST

Colleen Murray at Treasury Notes, the blog at the US Treasury, writes:

...the current calls to repeal the Dodd-Frank Act are a significant cause of the uncertainty that responsible business leaders are seeking to avoid.  Once it is fully implemented, the Dodd-Frank Act will improve market certainty, strengthen the financial system, and help boost the economy.

They are fighting against attempts to roll back financial regulation. I have no problem with that -- just wish they'd also noted that Dodd-Frank should be the beginning rather than the end of our efforts to reform the financial system. More is needed.

"Paul Krugman Unsuccessful Smackdown Watch Blogging"

Posted: 03 Jan 2012 02:13 PM PST

Not sure if Tyler Cowen's (mostly weak) response to Krugman points a finger in this direction or not with its reference to "some of the left-wing economics blogs." In any case, I'll let Brad DeLong handle the response:

Show, Don't Tell!: Paul Krugman Unsuccessful Smackdown Watch Blogging

Update: Krugman also responds.

"He’s a Paranoid Crank"

Posted: 03 Jan 2012 12:01 PM PST

I don't think David Frum is a Ron Paul supporter:

Ron Paul's Personal Responsibility: ...Ron Paul's supporters ask that their candidate not be judged by his associates. Or by the people he chose to employ. Or by the newsletters he published. Or by the book he wrote. Or by the way he earned the largest part of his living when out of office in the 1990s. Or by his purchase of the mailing list of the Holocaust-denying Liberty Lobby. Or by the radio shows he chooses to appear on. Or by his strategic decision to reach out to racist voters. Or by the conspiracy theories to which he lends credence, from government creation of AIDS to Israeli culpability for the 1993 bombing to a putative 9/11 "coverup."
And here I thought that libertarianism was a doctrine of personal responsibility?
May Ron Paul at least be judged by the words he has spoken with his own mouth within the current campaign? The supporters say "no" again. When Ron Paul tells an interviewer that the Civil Rights Act of 1964 made race relations "worse," we're not supposed to consider what he might mean by "better." When Ron Paul warns that a border fence would be used to prevent fleeing American citizens from exiting the country, we're not supposed to conclude that he's a paranoid crank. ...
Here's my question for Ron Paul supporters: why the denial of the undeniable?
Perhaps you like Paul's message of legalized marijuana? Why not just say so? You don't think it's important to stop Iran from gaining nuclear weapons? Argue it forthrightly. If you regard Social Security and Medicare as literally the moral equivalents of slavery, go ahead, make your case.
But all this excuse-making, special pleading and jiggering of the rules of evidence so as to exculpate Ron Paul from the record of his whole political life? For what?

Many liberals supporting Obama have the same blinders on when it comes to war and civil liberties (or, for that matter, his centrist leanings more generally). I'm really hating the choices I'll have in November.

"Climate Change – Our Real Bequest to Future Generations"

Posted: 03 Jan 2012 09:18 AM PST

Dean Baker:

Climate change – our real bequest to future generations, Commentary, by Dean Baker: It is remarkable how efforts to reduce the government deficit/debt are often portrayed as a generational issue, while efforts to reduce global warming are almost never framed in this way. ...
Seeing the debt as an issue between generations is wrong in almost every dimension. The ... debt is not money that our children and grandchildren will be paying to someone else. It is money that they will be paying to themselves. ...
Of course, some of this debt will be owned by foreigners. ... However, the foreign ownership of US financial assets, including government debt, is determined by our trade deficit, not our budget deficit.
Those who proclaim themselves concerned that our grandchildren will be stuck making huge payments to ... foreigners should be focused on reducing the value of the dollar. A more competitively priced dollar will be the key to ... reducing the outflow of dollars each year that are used to buy up US financial assets.
The main factor that will determine the economic wellbeing of our children and grandchildren will be ... the quality of the capital and infrastructure we pass onto them, along with the level of education we give them, the state of technical knowledge we achieve, and the state of the natural environment.
If we cut the deficit by making spending cuts ... in these areas, we will be making our children worse-off... Of course, leaving their parents unemployed for long periods of time will not improve our children's wellbeing either.
If the deficit has little to with the wellbeing of our children and grandchildren, global warming has everything to do with it. ... Global warming threatens to do far more damage to the wellbeing of future generations than the social security and Medicare benefits going to baby-boomers, no matter how much the deficit hawks try to twist the numbers to claim otherwise.

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