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August 7, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 03 Jul 2012 12:24 AM PDT
New column:
Physicists Can Learn from Economists, by Mark Thoma: After attending last year's Economics Nobel Laureates Meeting in Lindau, Germany, I was very critical of what I heard from the laureates at the meeting.  The conference is intended to bring graduate students together with the Nobel Prize winners to learn about fruitful areas for future research. Yet, with all the challenges the Great Recession posed for macroeconomic models, very little of the conference was devoted to anything related to the Great Recession. And when it did come up, the comments were "all over the map." And some, such as Ed Prescott, were particularly appalling as they made very obvious political statements in the guise of economic analysis. I felt bad for the students who had come to the conference hoping to gain insight about where macroeconomics was headed in the future.
I am back at the meetings this year, but the topic is physics, not economics, and it's pretty clear that most physicists think they have nothing to learn from lowly economists. That's true even when they are working on problems in economics and finance.
But they do have something to learn. ...
Posted: 03 Jul 2012 12:15 AM PDT
Tim Duy:
Manufacturing Turns South, by Tim Duy: Today's ISM manufacturing report revealed clear signals of global weakness. Does it point to an impending US recession? Not necessarily. Does it point to additional Fed easing? Also not necessarily. In short, I don't think this data is yet sending a particularly clear signal about the US economy.
First, the headline number:
Ism1
I marked the initiation of Fed easing cycles since 1995. Notably, multiple sub-50 ISM readings have traditionally triggered Fed easing, with the 2007 rate cut being something of an outlier. Of course, we have yet to start the tightening cycle this time around, but it is safe to say that ongoing sub-50 readings were generally consistent with ongoing easing. On balance, a first look of the data thus suggests additional Fed easing. Notice, however, that a sub-50 reading does not always indicate a fresh recession is on the way. Not by a long-shot.
Two not-necessarily exclusive issues are likely at play. First, the drop in the ISM index might be indicative of external issues that are insufficient to trigger a recession in the US. In other words, recessions are domestic events; the external sector alone is simply too small to overwhelm the internal tide. Second, the appropriate application of monetary policy might have been sufficient to safeguard against recession given the relatively small external threat.
I think it is clear that new orders sagged as a result of external weakness:
Ism3
Both the 1998 and 2001 easings followed sharp falls in the export index. Less so for the 1995 easing, but some external weakness was clearly at play. The 2007 easing was primarily a domestic issue; at the time, the external sector was source of strength. The general story, however, is that the Federal Reserve has tended to lean against external weakness. Not because, as some Fed officials have erroneously suggested, policymakers believed they could "solve" the external problems, but because they hoped to minimize the domestic impact. Yet another reason to believe additional Fed easing is on its way.
As always, however, the story is not clear cut. Note the employment index:
Ism5
Fed easing has traditionally been associated with labor market weakness. Soft weakness is not evident in this report, consistent with the belief (also identified by Nomura, via FT Alphaville) that manufacturers do not believe the external weakness is sufficient to derail the recovery. This should be particularly important with regards to additional Fed easing at this juncture, as policymakers have made it clear that progress, or lack thereof, in the labor market is a critical indicator. By this measure, then, the ISM report would not trigger additional easing. Much more important is the next employment report and the initial weekly claims reports leading into the next meeting.
Finally, when considering the recession implications of the ISM report, I also watch the imports component:
Ism4
The theory is that a sharp drop in domestic demand - the type associated with recessions - should cause a drop in imports. By this measure, the domestic-side of the coin is not yet joining in the external weakness. A strike against seeing this ISM report as an indicator of impending recession.
Bottom Line: The ISM report is murkier than the headline drop would suggest. It is clearly consistent with external weakness. The global economy is obviously struggling. As of yet, however, the story told by the employment and import sub-indexes is that the domestic economy is proving relatively resistant. Maintaining that resistance, however, may be dependent on additional monetary easing. Indeed, in the past, the Federal Reserve has tended to take out such insurance. But in the past, the zero bound has not been a constraint. This time it is. Will the Fed deliver easing with the necessary force to serve as adequate insurance? I am wary that this report gives us much direction on that point, especially given the relatively solid reading on employment. Ultimately, this report is probably a small piece of the puzzle; the employment data remains the key.
Posted: 03 Jul 2012 12:06 AM PDT
Posted: 02 Jul 2012 03:33 PM PDT
When Steven Williamson isn't suffering from Krugman Derangement Syndrome, a frequent ailment, he can ask good questions:
Some Doubts About NGDP Targeting
In one part of the post, he says:
If we were to judge past monetary policy performance by variability in NGDP, that performance would appear to be poor. What's that tell you? It will be a cold day in hell when the Fed adopts NGDP targeting. Just as the Fed likes the Taylor rule, as it confirms the Fed's belief in the wisdom of its own actions, the Fed will not buy into a policy rule that makes its previous actions look stupid.
I'll be interested to hear the responses to his questions (assuming he has more luck than David Andolfatto in getting advocates of NGDP targeting to repond). I'm trying to be open minded, but it is not yet clear to me that NGDP targeting is the optimal policy rule in the sticky wage and price models used to evaluate monetary policy. (I have doubts about the models as well, which is why I'd like to better understand the classes of models for which NGDP targeting is optimal, and the classes for which it's not. I have a pretty good idea of how to answer that question for the Taylor rule, but am less certain for NGDP targeting. It could be that NGDP targeting is relatively robust to model uncertainty, i.e. it does well in many classes of models even though it may not be optimal within any particular class -- that would work in its favor -- but that is not yet clear either.)
Update: Scott Sumner responds. Update: Nick Rowe responds to David Andolfatto.
Posted: 02 Jul 2012 03:24 PM PDT
Here's the climate change skepticism talk that had me Tweeting so furiously (abstract here):
Ivar Giaever: The Strange Case of "Global Warming"
Here's the prebuttal (the talk before this one). Near the end, Mario Molina is very direct about the next speaker -- he makes it clear that he thinks the arguments are nonsense and coming from a non-expert, the word "ashamed" is used, and so on:
Mario J. Molina: The Science and Policy of Climate Change
See also:
Photosynthesis, Biomass, Biofuels: Conversion Efficiencies and Consequences, by Hartmut Michel (he ends up recommending photovoltaic cells and batteries to power cars rather than biogas or biofuels which are much less efficient)
and:
Atmospheric Chemistry and Climate in the Anthropocene, by Paul J. Crutzen
(the last talk is a bit dry).
It's interesting to see Nobel Prize winners in physics accusing each other of engaging in religion/politics rather than science, etc., etc.  It all sounds quite familiar.
[Update: More discussion of today's session here.]
Posted: 02 Jul 2012 01:35 PM PDT
Tim Duy reports from French Polynesia:
Cue The Jimmy Buffet Playlist, by Tim Duy
He seems to like it.
Posted: 02 Jul 2012 08:55 AM PDT
Mark Levinson:
Mismeasuring Poverty, by Mark Levinson, American Prospect: The "facts" about poverty can be deceiving. In her magisterial book Behind the Beautiful Forevers, Katherine Boo tells the stories of the inhabitants of a Mumbai slum on the edge of a sewage lake who lack jobs, housing, running water, health care, education, and police protection. It is not unusual to see rats and frogs fried for dinner, feet covered with black fungus, and maggots breeding in wounds wrought by trash-picking. Yet, Boo writes, "almost no one in the slum was considered poor by official Indian benchmarks. … [They] were thus part of one of the most stirring success narratives in the modern history of global market capitalism." Some success.
 Our government's own count of the poor, while not denying their existence, also minimizes their number—not by undercounting them (though that's a factor, too) but by setting the poverty bar so low that tens of millions of poor Americans are not accounted for. This miscategorization not only paints a picture of a more prosperous America than in fact exists. It also excludes large numbers of the poor from assistance that they need and might otherwise obtain.
In fact, the poor are with us today in greater numbers than we have seen since we started keeping track over half a century ago. If we counted them by the standards that most other industrialized democracies employ, their numbers would increase by a third—from 46 million to roughly 69 million. To understand how that can be, it is important to grasp the way we define poverty and what that definition has to do with economic hardship. ...[continue reading]...
Posted: 02 Jul 2012 08:37 AM PDT
Tastes vary, but I liked this talk:
Observations, and the Standard Model of Cosmology Lecture: Monday, 2 July, 9.00 hrs, by Brian P. Schmidt: The standard model by which we understand the global properties of the Universe has emerged over the past 90 years based on the equations of General Relativity with the assumption that our Universe is homogeneous and isotropic. The relevant constants in this model are the Hubble constant (or current rate of cosmic expansion), the relative fractions of the species of matter that contribute to the energy density of the Universe, and these species' equation of state, and the total density of all species of matter (which is equivalent to knowing the geometrical topology of the Universe).
To understand the formation of structures in the Universe, it has been necessary to have initial conditions where the Universe starts out nearly uniform in temperature and density, but with small approximately scale-free Gaussian perturbations. These initial conditions are thought to arise from a period of inflation – where the universe exponentially expanded – soon after the Big Bang. It has also been necessary to divide pressureless matter into two components. One of baryons, and the other of Cold Dark Matter, a so far invisible form of matter whose principal form of interaction is via gravity.
Lindau - Monday 004
This standard model of the Universe is currently constrained by a number of observations. These include the primordial abundance of H, 2H,He, and Li, as predicted by Big Bang Nucleosynthesis, the power spectrum of baryon acoustic oscillations (BAOs) as seen in the Cosmic Microwave Background, the size of the BAOs delineated in the large scale structure of galaxies as well as the shape of the galaxies' power spectrum, distances measured to supernovae using their apparent brightness as a function of redshift, and the locally measured value of the Hubble Constant. These observations are consistent with a 13.7 Billion year old Universe which is geometrically flat, composed of 4.5% of baryons, 22.5% Cold Dark Matter, and 73% a form of Dark Energy which has negative gravitational pressure.
I will briefly overview the standard model, and discuss the current set of observations that provides the strongest constraints on the Cosmological parameters. I will also highlight future observations that might provide improved insights into understanding the cosmological parameters which govern the evolution of the cosmos on global scales.

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