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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 20 Jul 2012 12:33 AM PDT
What happens when the rich are not "safely ensconced in a bubble of deference and flattery"?:
Pathos of the Plutocrat, by Paul Krugman, Commentary, NY Times: ... It's no secret that, at this point, many of America's richest men — including some former Obama supporters — hate, just hate, President Obama. Why? Well, according to them, it's because he "demonizes" business — or as Mitt Romney put it earlier this week, he "attacks success." ...
Needless to say, this is crazy. In fact, Mr. Obama always bends over backward to declare his support for free enterprise and his belief that getting rich is perfectly fine. All that he has done is to suggest that sometimes businesses behave badly, and that this is one reason we need things like financial regulation. No matter: even this hint that sometimes the rich aren't completely praiseworthy has been enough to drive plutocrats wild. ...
Wait, there's more. Not only do many of the superrich feel deeply aggrieved at the notion that anyone in their class might face criticism, they also insist that their perception that Mr. Obama doesn't like them is at the root of our economic problems. Businesses aren't investing, they say, because business leaders don't feel valued. Mr. Romney repeated this line, too, arguing that because the president attacks success "we have less success."
This, too, is crazy... Because the rich are different from you and me, many of them are incredibly self-centered. They don't even see how funny it is — how ridiculous they look — when they attribute the weakness of a $15 trillion economy to their own hurt feelings. After all, who's going to tell them? They're safely ensconced in a bubble of deference and flattery.
Unless, that is, they run for public office.
Like everyone else following the news, I've been awe-struck by the way questions about Mr. Romney's career at Bain Capital,... and his refusal to release tax returns have so obviously caught the Romney campaign off guard... Clearly, Mr. Romney believed that he could run for president while remaining safe inside the plutocratic bubble and is both shocked and angry at the discovery that the rules that apply to others also apply to people like him. ...
O.K., let's take a deep breath. ... There are plenty of very rich Americans who have a sense of perspective, who take pride in their achievements without believing that their success entitles them to live by different rules.
But Mitt Romney, it seems, isn't one of those people. And that discovery may be an even bigger issue than whatever is hidden in those tax returns he won't release.
Posted: 20 Jul 2012 12:24 AM PDT
Pro-cyclical fiscal policy should be avoided, "Yet many politicians in the United States, the United Kingdom, and the eurozone seem to live by it":
The First World's Fiscal Follies, by Jeff Frankel, Commentary, Project Syndicate: ...Keynesian macroeconomic policy lost its luster mainly because politicians often failed to time countercyclical fiscal policy – "fine tuning" – properly. ... But that is no reason to follow a destabilizing pro-cyclical fiscal policy, which piles spending increases and tax cuts on top of booms, and cuts spending and raises taxes in response to downturns.
Pro-cyclical fiscal policy worsens the dangers of overheating, inflation, and asset bubbles during booms, and exacerbates output and employment losses during recessions, thereby magnifying the swings of the business cycle. Yet many politicians in the United States, the United Kingdom, and the eurozone seem to live by it. They argue against fiscal discipline when the economy is strong, only to become deficit hawks when the economy is weak.
Consider the positions taken over the last three decades by ... Ronald Reagan..., George H.W. Bush ..., Republican congressmen...,George W. Bush..., Republicans... In my view, the government spending cutbacks of the last two years are the most important reason why the economic recovery that began in June 2009 subsequently stalled in 2011.
Here ... are three generations of politicians who favored fiscal expansion during booms (1982-1989, 1992-2000, 2002-2007) and austerity during recessions (1980, 1981, 1990, 2008-09). ...
But the pattern is understandable: when the economy is booming, there is no political support for painful spending cuts or tax increases. There is a hole in the roof, but the sun is shining. Then, when the thunderstorms roll in, sinners suddenly get religion and proclaim the necessity of reforming – just when it is most difficult to fix the problem.
Historically, it used to be developing countries whose dysfunctional political systems produced pro-cyclical fiscal policies. ... But things have changed..., a majority of the governments that have pursued countercyclical fiscal policies since 2000 are in emerging-market or developing countries. They figured out how to achieve countercyclical fiscal policy during precisely the decade when so many politicians in "advanced countries" forgot.
Posted: 20 Jul 2012 12:06 AM PDT
Posted: 19 Jul 2012 06:48 AM PDT
Amir Sufi of the University of Chicago Booth School of Business:
Seizures May Be Cities' Last Hope in Mortgage Crisis, by Amir Sufi, Commentary, Bloomberg: The failure to address crippling household-debt burdens is leading local governments to embrace the radical idea of using eminent domain to seize and write down mortgages.
Over the past month, two cities in California -- Stockton and San Bernardino -- have made moves to file for bankruptcy. ... The San Bernardino and Stockton episodes are representative of a national crisis: Crippling household-debt burdens and foreclosures have been dragging down the economy for the past five years. Renegotiation of underwater mortgages by the private sector has been almost nonexistent. Despite strong evidence that frictions related to securitized mortgages are preventing the efficient restructuring of household-debt burdens, policy makers have largely sat on the sidelines.
With local governments feeling directly threatened, some cities have put forth a bold solution: Governments should use eminent-domain powers to buy mortgages, impose losses on bondholders, and write down principal amounts owed by the borrower. The argument is pretty simple: Debt burdens and foreclosures are crushing our cities; private lenders are showing no willingness to renegotiate; and there are no meaningful attempts at the federal level to help. San Bernardino and Stockton are Exhibits A and B.
Using eminent domain to impose losses on bondholders is unquestionably a radical idea. ... There comes a point, however, when it becomes impossible to impose further losses on debtors. And when that happens, creditors are expected to take losses on their positions. This is exactly why restructuring debt contracts is a valuable and important part of the financial system. In corporations and commercial real estate, such restructuring happens every day.
But this isn't happening in mortgage markets. ... Bondholders and other creditors are understandably furious at the violation of private contracts implied by the eminent- domain proposals. They shouldn't be surprised, though. Everyone has a breaking point. Proposals to write down debt will become even more radical unless the private sector shows a greater willingness to renegotiate mortgages.
I hope we have learned a point I've tried to make again and again here, that helping households with their balance sheet problems is essential in curing a balance sheet recession. Banks got plenty of help with their balance sheet problems based upon the "too big to fail" argument, but households didn't get as much attention. Collectively, households are too big to fail as well, but we let them fail anyway and are now paying a much higher cost than if we'd done more to address household balance sheet problems early in the recession.
[See here for a recent link/discussion to additional research from Mian and Sufi on What Explains High Unemployment? The Aggregate Demand Channel.]
Posted: 19 Jul 2012 05:49 AM PDT
I forgot to link to my comments on Bernanke's testimony the other day. They were a bit rushed anyway (supposed to be on vacation, and was traveling to a new place, so I wrote this stopped along the side of the road):
Bernanke gives little indication that QE3 is on the way
However, as I noted, if economic conditions continue as they are -- employment basically stalled, inflation below target -- the Fed is very likely to act at its next meeting, if not before.
[But if a few encouraging signals arrive amidst the gloom, they may latch onto those observations as a reason to stay the current policy course. I can't hope against good news, but I can hope that Fed officials will see the bigger picture and ease more despite a few contrary indicators that give them an excuse to avoid tough decisions and forestall further action.
Are they worried, as Paul Krugman has wondered, about being seen as helping Obama? I've always taught that the Fed is reluctant to make big moves near elections, monetary policymakers don't want to be seen as helping one side or the other, but not doing anything more will be viewed as giving in to Republicans in the House and elsewhere who have all but threatened the Fed's independence if it tries to do more to help the economy. So no matter what they do, or don't do, it will be seen as taking sides, so monetary policymakers may as well do what's best for the economy (a truly independent Fed would stand above such threats). In my view, that means more easing even if a few contrary data points between now and the next meeting point in another direction.]
Posted: 19 Jul 2012 05:31 AM PDT
Simon Wren-Lewis is tired of making the same old arguments. I am too, so I'll let him take this one on:
Tired Old Debates: Daniel Gros has a Vox piece attacking the Krugman/Layard manifesto. Like Stephanie Flanders here, there is part of me that is tired of going over this again and again, as the arguments on the other side do not get any better. But I know that this is a battle we have to win, if only so that others do not need to fight it a third time. And I did have one new thought.
Before that, let's just go through the economics one more time. Macroeconomic theory is as clear as it can be that austerity in the current situation will reduce output and raise unemployment. ... The evidence is also about as clear as it ever is in macro.
On the other hand, the 'evidence' Daniel Gros uses is of the following kind. The US recovery has been similar to that in the Eurozone, and the US had more initial fiscal expansion, so therefore austerity is not that important. These are the kind of arguments we use to persuade our students that they should take a course in econometrics.
But here is my new thought. Why not apply the same arguments to monetary policy. Interest rates were reduced faster and by more in the US than in the Eurozone, but the recovery has been similar, so clearly monetary policy does not matter much either. In the UK the recovery has stalled even though interest rates are zero. In addition keeping interest rates very low can cause longer term problems, so start raising them now, if not yesterday! No one (almost) makes this argument, because it is so obviously silly. So why do good economists think they can make the same argument for fiscal policy?
The only defensible argument for austerity now is that we have reached some critical debt limit, but the low level of interest rates on UK and US debt (and everywhere else besides the Eurozone) kill that dead. Everyone is agreed that once recovery is complete, we do need to start reducing debt. Everyone also agrees that when the recovery is complete, interest rates need to rise. But almost no one is arguing for higher interest rates now. So why fiscal austerity now?
One quick comment: Too many economists are calling for interest rate increases now, not later, so while it is "obviously silly," it is not as rare as it ought to be.

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