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August 7, 2012

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Posted: 15 Jun 2012 02:43 AM PDT
Just a quick note. I have a somewhat brutal travel schedule the next few days, and when all is said and done, I ought to be in Nairobi, Kenya:
IRP's International Bloggers Take on Reproductive Health in Kenya: Twelve international bloggers have been selected to report on pressing issues of reproductive health and population in Kenya this month.
In an exciting new global initiative, the International Reporting Project (IRP) is taking a group of 12 influential bloggers from around the world to Kenya on June 17-26 for an in-depth examination of reproductive health and population issues in that East African country.
Watch the IRP website for regular updates from the bloggers, and follow them on Twitter as they recount their impressions and observations of Kenya. This is the first time in its 15-year history that the IRP is taking a group of new media journalists from different countries around the world to focus on a specific global issue. The 12 bloggers come from eight countries and represent a unique diverse set of specialties – including religion, ethics, culture, economics and gender issues in the developed world. In an intensive schedule that will take them to three different regions of Kenya, the bloggers will talk to Kenyan parents and children, health officials, rural and urban citizens and experts on gender, religion and ethics. Kenya's population is expected to double by 2040 and the country faces major health challenges, urban migration and environmental pressures caused by this rapidly growing population. [list of participants]
They know that I am not an expert on women's reproductive health issues, though I will talk about related economic issues, but my main focus will be on economic problems in Kenya (I already have around 10 background posts set to go). And no, you aren't the first person to make an Obama joke.
After that, I'm going to this year's Nobel meetings in Lindau, Germany (the meetings bring Nobel laureates together with 500-600 graduate students from around the world). I'll stop over in Zurich for three days first, but since I was going through Zurich anyway on the way back from Kenya, I figured why not go to Lindau too -- it isn't very far away. I went last year when the topic was economics, but this year the Nobel winners are from chemistry and physics. Since it isn't economics I was surprised to be invited, and had to be accredited as press to get in (ha, I was), but there are issues related to economics, e.g. global warming that I want to cover. But mostly I'm looking forward to hearing talks on something other than economics. It will be a nice break, and for the most part I have no idea what I'll be hearing (or writing about).
Then, home for 4 days and off to Boston for an NBER meeting, and some other stuff. Finally home in late July.
I am going to do my best to keep up with the blog. I have at least two posts already loaded for each day of the time I'll be in Kenya, we have been promised internet access daily and some blogging time (though nothing like usual -- withdrawals!), and I have an unlocked iPhone that I hope to load with a sim chip and tons of prepaid data (from Safaricom). We'll see how that goes, but if it works I can (fingers crossed) tether to my computer and have fairly good internet access. But I have no idea what's ahead, and I hope you will understand if I am not able to keep up with links in particular on the usual, regular schedule. I'll try, but realistically it will be hard.
I never would have guessed that an economics blog would bring so much travel.
Posted: 15 Jun 2012 12:33 AM PDT
When Republicans talk about reducing the size of government, what does that really mean?:
We Don't Need No Education, by Paul Krugman, Commentary, NY Times: Hope springs eternal. For a few hours I was ready to applaud Mitt Romney for speaking honestly about what his calls for smaller government actually mean.
Never mind. Soon the candidate was being his normal self, denying having said what he said... In the remarks Mr. Romney ... derided President Obama: "He says we need more firemen, more policemen, more teachers." Then he declared, "It's time for us to cut back on government and help the American people." ...
For once, he actually admitted what he and his allies mean when they talk about shrinking government. Conservatives love to pretend that there are vast armies of government bureaucrats doing who knows what; in reality, a majority of government workers are employed providing either education (teachers) or public protection (police officers and firefighters). ...
But the more relevant question for the moment is whether the public job cuts Mr. Romney applauds are good or bad for the economy. And we now have a lot of evidence ... that austerity in the face of a depressed economy is a terrible mistake to be avoided if possible.
And the point is that in America it is possible ... to reverse the job cuts that are killing the recovery: have the feds, who can borrow at historically low rates, provide aid that helps state and local governments weather the hard times. That, in essence, is what the president was proposing and Mr. Romney was deriding. ...
Actually, it's kind of ironic. While Republicans love to engage in Europe-bashing, they're actually the ones who want us to emulate European-style austerity and experience a European-style depression.
And that's not just an inference. Last week R. Glenn Hubbard..., a top Romney adviser, published an article in a German newspaper urging the Germans to ... continue pushing their hard-line policies. In so doing, Mr. Hubbard was ... throwing his support behind a policy that is collapsing as you read this.
In fact, almost everyone following the situation now realizes that Germany's austerity obsession has brought Europe to the edge of catastrophe — almost everyone, that is, except the Germans themselves and, it turns out, the Romney economic team.
Needless to say, this bodes ill if Mr. Romney wins in November. For all indications are that the his idea of smart policy is to double down on the very spending cuts that have hobbled recovery here and sent Europe into an economic and political tailspin.
Posted: 15 Jun 2012 12:24 AM PDT
Tim Duy:
Greece Now Just a Footnote, by Tim Duy: This weekend's Greek elections are the focus of intense speculation with market participants - and, so we are told, global central bankers - preparing for the worst. I am not quite sure that Greece should be such a focus at this point. I think Kiron Sakar over at The Big Picture is on the right track on this one:
The reality is that Mr Tsipras wont be able to negotiate a better deal (he is delusional) and if he is in power and maintains his current position, Greece will be out of the EZ pretty soon thereafter. If New Democracy wins and can form a coalition, there will be some give from the rest of the EZ, but the Greeks will never deliver, which suggests to me that they will be forced to exit, but a little bit later.
That sounds about right; Greece is pretty much a lost cause at this point, regardless of this weekend's outcome. And worrying about contagion from Greece is just a little too late. The story is now Spain, whose ten-year yields brushed up against 7% today. And Italy, who sold three-year debt at 5.3% and ten-year yields above 6%. And increasingly you hear France as well. This has gone way beyond Greece at this point.
Meanwhile, the ECB remains on the sidelines, reportedly waiting for European fiscal policymakers to make the next step. According to Nouriel Roubini from his frequent emails:
If EU leaders could formulate, and demonstrate commitment toward, a clear plan to achieve a full fiscal, banking and political union that would also involve debt mutualization, the ECB would be willing to take appropriate policy actions to promote this integration and provide a bridge toward a broader union. A successful strategy would entail less front-loaded fiscal austerity and structural reforms; a growth compact that is substantial and not just cosmetic; a full banking union, starting with EZ-wide deposit insurance; and fiscal union and debt mutualization in the EZ.
Well, that's pretty much asking for heaven and earth, isn't it? I don't see how the Europeans are going to pull that together before their summer vacation. And I can't see that France lowering the retirement age to 60 is going to help - it won't exactly help ease German fears that a fiscal union will be little more than a mechanism for Germany to fund the rest of Europe. And regardless of the French move, Germany remains something of a stick in the mud. From German Chancellor Angela Merkel, via the FT:
In a restatement of the limits to German action in tackling the debt crisis, she reeled off a list of unacceptable demands from other countries – including the US and UK – for "big bang" solutions to solve the crisis.
They included jointly guaranteed eurozone bonds, which she described as "counter-productive" and illegal under the German constitution, as well as a publicly financed European bank deposit insurance scheme, and France's new call for a "financial stability package".
Merkel is right about one thing:
"Europe has set out to complete economic and monetary union," she said. "Here we are certainly in a race with the markets."
I hope she does have a workable scheme up her sleeve, because as it looks right now, she is in a race she can't win.
Posted: 15 Jun 2012 12:15 AM PDT
One more from Tim Duy:
Measures of Financial Stress, by Tim Duy: Since we are all running downhill and gaining speed with expectations that the Federal Reserve will do "something" on a grand scale next week, I thought I would continue on with my earlier theme of looking at the other side of the story. With that in mind, some measures of financial stress:
Stlfin
Chigfin
Vix
This snapshot suggests that financial stress, at least in the US, is no worse, and on average better, than during last year's Eurocrisis flareup. Nor, as I suggested in my last post, do I think we have enough data to make significant downward revisions to the economic forecast. Yet increasingly market participants are thinking the Fed will move forward with a sizable new QE program. Which means, compared to last year's Operation Twist, expecting the Fed to do more on the basis of less.
Not that they won't; the Eurocrisis is putting plenty of downside risk in the forecast. But it is something to think about.
Posted: 15 Jun 2012 12:06 AM PDT
Posted: 14 Jun 2012 12:26 PM PDT
Jeff Frankel takes up the question of inflation targeting versus nominal GDP targeting, and concludes that nominal GDP targeting has many advantages:
Nominal GDP Targeting Could Take the Place of Inflation Targeting, by Jeff Frankel: In my preceding blogpost, I argued that the developments of the last five years have sharply pointed up the limitations of Inflation Targeting (IT)...   But if IT is dead, what is to take its place as an intermediate target that central banks can use to anchor expectations?
The leading candidate to take the position of preferred nominal anchor is probably Nominal GDP Targeting.  It has gained popularity rather suddenly, over the last year.  But the idea is not new.  It had been a candidate to succeed money targeting in the 1980s, because it did not share the latter's vulnerability to shifts in money demand.  Under certain conditions, it dominates not only a money target (due to velocity shocks) but also an exchange rate target  (if exchange rate shocks are large) and a price level target (if supply shocks are large).   First proposed by James Meade (1978), it attracted the interest in the 1980s of such eminent economists as Jim Tobin (1983), Charlie Bean (1983), Bob Gordon (1985), Ken West (1986), Martin Feldstein & Jim Stock (1994), Bob Hall & Greg Mankiw (1994), Ben McCallum (1987, 1999), and others.
Nominal GDP targeting was not adopted by any country in the 1980s.  Amazingly, the founders of the European Central Bank in the 1990s never even considered it on their list of possible anchors for euro monetary policy.  ...
But now nominal GDP targeting is back, thanks to enthusiastic blogging by Scott Sumner (at Money Illusion), Lars Christensen (at Market Monetarist), David Beckworth (at Macromarket Musings), Marcus Nunes (at Historinhas) and others.  Indeed, the Economist has held up the successful revival of this idea as an example of the benefits to society of the blogosphere.  Economists at Goldman Sachs have also come out in favor. 
Fans of nominal GDP targeting point out that it would not, like Inflation Targeting, have the problem of excessive tightening in response to adverse supply shocks. ...
In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target).   But why has it suddenly gained popularity at this point in history...?  Nominal GDP targeting might also have another advantage in the current unfortunate economic situation that afflicts much of the world:  Its proponents see it as a way of achieving a monetary expansion that is much-needed at the current juncture.
Monetary easing in advanced countries since 2008, though strong, has not been strong enough to bring unemployment down rapidly nor to restore output to potential.  It is hard to get the real interest rate down when the nominal interest rate is already close to zero. This has led some, such as Olivier Blanchard and Paul Krugman, to recommend that central banks announce a higher inflation target: 4 or 5 per cent.  ...  But most economists, and an even higher percentage of central bankers, are loath to give up the anchoring of expected inflation at 2 per cent which they fought so long and hard to achieve in the 1980s and 1990s.  Of course one could declare that the shift from a 2 % target to 4 % would be temporary.  But it is hard to deny that this would damage the long-run credibility of the sacrosanct 2% number.   An attraction of nominal GDP targeting is that one could set a target for nominal GDP that constituted 4 or 5% increase over the coming year - which for a country teetering on the fence between recovery and recession would in effect supply as much monetary ease as a 4% inflation target - and yet one would not be giving up the hard-won emphasis on 2% inflation as the long-run anchor.
Thus nominal GDP targeting could help address our current problems as well as a durable monetary regime for the future.
It's hard to figure out how to fix the world if you don't have a reliable model that can explain what went wrong. The optimal money rule in a model depends upon the the way in which changes in monetary policy are transmitted to the real economy. Is it because of price rigidities? Wage rigidities? Information problems? Credit frictions and rationing? The best response to a negative shock to the economy varies depending upon what type of model the investigator is using.
Thus, for the moment we need robust rules. Inflation targeting works well in models with Calvo type price-rigidities, and a Taylor type rule often emerges from models in this general class, but is this the most robust rule in the face of model uncertainty? We don't know the true model of the macroeconomy, that ought to be clear at this point. Does inflation targeting work well when the underlying problem is a breakdown in financial intermediation or other big problems in the financial sector? I'm not at all convinced that it does - some of the best remedies in this case involve abandoning a strict adherence to an inflation target in the short-run.
So, in the best of all worlds I'd prefer to have a model of the economy that works, find the optimal policy rule for that model, and then execute it. In the world we live in, I want robust rules -- rules that work well in a variety of models and in the face of a variety of different types of shocks (or at least recognize that the rule has to change when the source of the problem switches from, say, price rigidities to a breakdown in financial intermediation). One message that comes out of the description of NGDP targeting above is that this approach does appear to be more robust than inflation targeting. It's not always better, in some models a standard Taylor type rule is the best that can be done. But it's becoming harder and harder to believe that the Great Recession can be adequately described by models of this type, and hence hard to believe that we are well served by policy rules that assume price rigidities are the main source of economic fluctuations.
Posted: 14 Jun 2012 12:24 PM PDT
Tim Duy:
Devil's Advocate, by Tim Duy: Expectations are building for Federal Reserve action next week. Bloomberg hits on a key point:
Chairman Ben S. Bernanke told lawmakers last week the "central question" confronting the Federal Reserve at its next meeting is whether growth is fast enough to make "material progress" reducing unemployment.
The answer may well be no...
..."They're not closing that employment gap as fast as they'd like, so I suspect it adds up to more action to get things moving again," said Michael Feroli, chief U.S. economist at New York-based JPMorgan Chase & Co. and a former researcher for the Federal Reserve Board in Washington. "Bernanke has a clear economic mandate, and we're still far from achieving it."
I think there are two issues at play, the forecast itself and the risk to that forecast. On the first point, I am not convinced that incoming data have proved sufficient to measurably change the forecast. On the key jobs issue, I keep getting pulled back to this from Bernanke's testimony:
This apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter. But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession. If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed, and, consequently, that more-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions.
I sense a great deal of uncertainty in the paragraph, suggesting to me that Bernanke would like to see more data before committing to a new policy path. Of course, one could point to the weak tenor of the most recent string of initial claims reports as additional evidence of a flagging job market:
Claimsshort
That said, I am still hard-pressed to see that this is sufficient to believe the steady downtrend in claims has been disrupted:
Claimslong
There is also the general sense that softer inflation numbers give the Fed room to act, particularly with headline CPI inflation now down below 2% year-over-year:
Cpi
On this point I would caution that the downward move in headline has yet to be confirmed by core. This should be a symmetric game. Just as core inflation never rose fast enough to justify concerns about headline inflation, sticky core inflation in the face of declining headline inflation would signal to the Federal Reserve that they should not yet reduce their inflation forecasts.
I would also add that the anecdotal evidence is less dire, to say the least. The most recent Beige book:
Reports from the twelve Federal Reserve Districts suggest overall economic activity expanded at a moderate pace during the reporting period from early April to late May. ...
Manufacturing continued to expand in most Districts. Consumer spending was unchanged or up modestly. New vehicle sales remained strong and inventories of some popular models were tight. Sales of used automobiles held steady. Travel and tourism expanded, boosted by both the business and leisure segments. Demand for nonfinancial services was generally stable to slightly higher since the last report, and several Districts noted strong growth in information technology services. Conditions in residential and commercial real estate improved. Construction picked up in many areas of the country. Lenders in most Districts noted an improvement in loan demand and credit conditions. Agricultural conditions generally improved, and spring planting was well ahead of its normal pace in most reporting Districts. Energy production and exploration continued to expand, except for coal producers who noted a slight slowing in activity.
Wage pressures overall were modest. Hiring was steady or increased slightly, and contacts in a number of Districts reported difficulties in finding qualified workers, particularly those with specialized skills. Price inflation remained modest across Districts, and overall cost pressures eased as the price of energy inputs declined. Economic outlooks remain positive, but contacts were slightly more guarded in their optimism.
Confirming that relatively upbeat view is this from Bloomberg:
Rising truck shipments show the U.S. economic expansion is intact, even amid concerns that a slowdown in retail sales and Europe's sovereign-debt crisis could stall growth.
Two measures of trucking activity signal the industry remains steady and has even "firmed up" since mid-May, according to Ben Hartford, an analyst in Milwaukee with Robert W. Baird & Co. The data complement anecdotal information from carriers that freight demand ended May on a strong note after more weakness than anticipated earlier in the month, he said.
"Trucking trends are reflective of an economic environment that is stable, not deteriorating," Hartford said.
To me, the upshot is that the data flow over the past two years has been sloppy, possibly a reflection seasonal adjustment issues, leaving the general rule of avoiding excessive optimism and excessive pessimism as the best bet. That rule argues for a relatively limited changes to the Fed's forecast.
If the Fed follows the above line of thinking, they will hold steady next week. In other words, there is a nontrivial risk that financial market participants are getting ahead of the Fed. That said, even if the forecast does not change materially, it seems pretty clear that the risks to the downside have increased. Indeed, the ECB is working overtime to ensure the risks remain to the downside. This argues for additional action, especially with a block of Fed officials - including Vice-Chair Janet Yellen, San Francisco Federal Reserve President John Williams, and Chicago Federal Reserve President Charles Evans - who likely already desired more easing under the most recent forecast.
Bottom Line: I think you can tell a story that the most recent data is not sufficient to move Fed forecasts, in which case it remains possible that the Fed does not implement any changes next week. I have to admit to being a little nervous that we get a Fed "leak" over the next few days in an effort to reset expectations ahead of the meeting. Still, given the increased downside risks to the forecast, it is hard for me to make this my baseline scenario, especially given the very dovish Yellen/Williams/Evan contingent, which is why I expect some action next week. But much still rests on Bernanke, who has surprised by positioning himself to the hawkish side of the center. After all, if he believed the Yellen/Williams/Evans stories, he would have eased already. He hasn't, suggesting that he has a pretty high bar to additional easing, and we just might not have crossed that bar.

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