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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 23 Jul 2012 12:33 AM PDT
The costs of climate change are already here:
Loading the Climate Dice, by Paul Krugman, Commentary, NY Times: A couple of weeks ago the Northeast was in the grip of a severe heat wave. As I write this, however, it's a fairly cool day... Weather is like that; it fluctuates.
And this banal observation may be what dooms us to climate catastrophe, in two ways. On one side, the variability of temperatures ... makes it easy to miss, ignore or obscure the longer-term upward trend. On the other, even a fairly modest rise in average temperatures translates into a much higher frequency of extreme events — like the devastating drought now gripping America's heartland — that do vast damage. ...
How should we think about the relationship between climate change and day-to-day experience? Almost a quarter of a century ago James Hansen, the NASA scientist..., suggested the analogy of loaded dice. Imagine ... representing the probabilities of a hot, average or cold summer by historical standards as a die with two faces painted red, two white and two blue. By the early 21st century,... it would be as if four of the faces were red, one white and one blue. Hot summers would become much more frequent, but there would still be cold summers now and then.
And so it has proved..., 9 of the 10 hottest years on record have occurred since 2000. But that's not all: really extreme high temperatures ... have now become fairly common. Think of it as rolling two sixes, which happens ... more often when the dice are loaded. And this rising incidence of extreme events ... means that the costs of climate change aren't a distant prospect, decades in the future. On the contrary, they're already here...
The great Midwestern drought is a case in point. This drought has already sent corn prices to their highest level ever..., it could cause a global food crisis... And yes, the drought is linked to climate change: such events have happened before, but they're much more likely now than they used to be.
Now, maybe this drought will break in time to avoid the worst. But there will be more events like this. ... Will the current drought finally lead to serious climate action? History isn't encouraging. The deniers will surely keep on denying... And the public is all too likely to lose interest again the next time the die comes up white or blue.
But let's hope that this time is different. For large-scale damage from climate change is no longer a disaster waiting to happen. It's happening now.
Posted: 23 Jul 2012 12:24 AM PDT
Tim Duy:
John Williams Gets It, by Tim Duy: Better late than never. San Francisco Federal Reserve President John Williams continues to make the case for another round of quantitative easing in an interview with Robin Harding at the Financial Times. I came away from the article with five takeaways:
1.) There will be little progress in the labor market in the absence of additional policy. Not surprising, given that the Fed's forecasts were never exactly exciting to begin with, and the recent weakness in the data flow is leading economists to downgrade Q2 growth to the 1% range, putting even the Fed's anemic forecasts into jeopardy.
2.) Williams believes the Fed should shift the focus to mortgage backed securities:
"There's a lot more you can buy without interfering with market function and you maybe get a little more bang for the buck," he said.
He sees MBS as an avenue around the potentially disruptive effects of additional Treasury purchases, acknowledging one of the concerns about additional QE.
3.) Importantly, Williams realizes that the arbitrary end-dates for policy actions are disruptive and counterproductive. Instead, he argues for open-ended purchases:
"The main benefit from my point of view is it will get the markets to stop focusing on the terminal date [when a programme of purchases ends] and also focusing on, 'Oh, are they going to do QE3?'" he said. Instead, markets would adjust their expectation of Fed purchases as economic conditions changed.
This is a big step, and, in my opinion, this is exactly where the Fed needs to go. Shift the focus from the policy itself to the macroeconomic outcomes the policy is trying to achieve. After two years of stop-start policy, Williams gets it.
4.) Eliminating interest on reserves is pretty much off the table. I never thought the Fed was too excited about the this option.
5.) Despite delivering a strong argument for QE, Williams himself is not convinced the FOMC will follow his lead:
But he declined to call directly for a Fed move. "I think the argument against further action is the question of uncertainty around the effects, the costs and the benefits of doing so," he said.
This uncertainty was evident in the minutes of the last FOMC meeting, as well as Federal Reserve Chairman Ben Bernanke's trip to Capitol Hill last week. While I would like to think that his generally dour outlook was in and of itself a signal that he was prepared to ease further, he made clear that QE was not the only option on the table. As quoted by the FT:
"We haven't really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labour market."
This makes me think that there is not broad support at the FOMC for additional QE, or, what I increasingly think is likely, that Bernanke himself is sufficiently uncertain about the impact of additional QE that he would prefer to find another tool, perhaps with the idea of reserving QE for a more dire situation. If Bernanke wanted to push the FOMC in the direction of QE, he could have done it well before now. Thus, the fact that such internal uncertainty remains about what the Fed would do next reveals something about his preferences.
Bottom Line: Williams again telegraphs his belief that the Fed should engage in additional quantitative easing, and makes a big step in calling for an open-ended program. It is not, however, clear the Bernanke has come to the same conclusion. It's really Bernanke, not the Fed hawks, that has been the impediment to further easing.
Thanks to CR for spotting this article tonight.
Posted: 23 Jul 2012 12:06 AM PDT
Posted: 22 Jul 2012 01:44 PM PDT
Jim Hamilton:
The fiscal cliff and rationality by Jim Hamilton: ...Let's begin by acknowledging the obvious: the United States faces a very significant long-run issue of fiscal solvency...-- if historical policies remain in effect for the next 15 years we are going to be in real trouble. There is no ambiguity about the fact that medical expenditures have been rising much faster than other categories, and that the American population is going to continue to age. The historical combination of existing tax rates and the rising federal role in health care is unquestionably unsustainable.
Although I emphatically agree that America needs to make changes today that change the fundamentals of those long-term trends, I do not think it is necessary to do so with immediate tax increases or spending cuts. As Karl Smith observes, with the current negative real yields on government debt, the government is actually making a profit by running a budget deficit... Granted, we've seen some of the European countries move ... to ... needing to pay very high interest costs very quickly in response to rapid shifts in investor sentiment. The U.S. would face an enormous problem if the same kind of debt flight were to hit our Treasury auction. That's one of the reasons why I think it's extremely important to put in place today policies that permanently change the long-term fundamentals, but whose fiscal bite increases only gradually over time. ...
However... Existing law tries to make the transition all at once with very significant tax increases and spending cuts. These are scheduled to be implemented at the end of this year, a situation that some refer to as "America's fiscal cliff." The tax increases and spending cuts ... sum to over $600 B in fiscal year 2013, a figure that represents about 4% of total GDP...
How big an effect this would have on the economy depends on the fiscal multiplier. ... But even if the multiplier were significantly less than 1, a 4% hit to government spending and consumer purchasing power, in an economy that is struggling to keep the growth rate above 2%, would be enough by itself to put the U.S. economy into recession. ...
What do I expect is actually going to happen? I propose that the key question to focus on is this: in whose interest would it be to see the U.S. go off the fiscal cliff into recession?
The clear answer is: no one's. Democrats don't want to see that happen, nor do Republicans. The logical thing to expect is therefore that somehow they'll figure out a way to modify existing law before January 1, postponing the lion's share of the tax increases and spending cuts for at least another year. ... But the cumbersome process of getting to that outcome will once again exact its own unique toll.
My priors place more weight on bad outcomes than his appear to do, in part because I don't see the political incentives as closely aligned as he does.
But let me turn this one over to you. Comments?

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