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September 3, 2012

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Paul Krugman: Rosie Ruiz Republicans

Posted: 03 Sep 2012 12:33 AM PDT

This election is about more than just different visions of society:

Rosie Ruiz Republicans, by Paul Krugman, Commentary, NY Times: Remember Rosie Ruiz? In 1980 she was the first woman to cross the finish line at the Boston Marathon — except it turned out that she hadn't actually run most of the race, that she sneaked onto the course around a mile from the end. Ever since, she has symbolized a particular kind of fraud, in which people claim credit for achieving things they have not, in fact, achieved.
And these days Paul Ryan is the Rosie Ruiz of American politics.
This would have been an apt comparison even before the curious story of Mr. Ryan's own marathon came to light. ... Mr. Ryan ... boasted ... that he had once run a marathon in less than three hours. ... It eventually transpired that ... his time was actually more than four hours. ...
Mr. Ryan tried to laugh the whole thing off as a simple error. But ... the difference between sub-three and over-four is ... not something a runner could get wrong, unless he's a fabulist who imagines his own reality. ...
What makes this incident so striking is ... the way it resonates with the essential Rosie-Ruizness of Mr. Ryan's whole political persona, which is built around big boasts about accomplishments he hasn't accomplished.
For Mr. Ryan ... has positioned himself as an icon of truth-telling and fiscal responsibility, while offering policy proposals that are neither honest nor responsible. ... Mr. Ryan basically told the budget office to assume that his plan would slash the deficit, then claimed the resulting report as vindication of his deficit-slashing claims. Sorry, but that's the policy equivalent of sneaking into a marathon near the finish line, then claiming victory.
Still, Mitt Romney, not Mr. Ryan, is the presidential candidate... So how does Romney/Ryan differ from Ryan alone? It's worse. ... Realistically, the Romney plan would explode the deficit, not reduce it. Yet Mr. Romney boasts about his fiscal responsibility... Yep, he's another Rosie Ruiz Republican.
So what is this election about? To be sure, it's about different visions of society — about Medicare versus Vouchercare, about preserving the safety net versus destroying it. But it's also a test of how far politicians can bend the truth. This is surely the first time one of our major parties has run a campaign so completely fraudulent, making claims so at odds with the reality of its policy proposals. But if the Romney/Ryan ticket wins, it won't be the last.

Fed Watch: Employment Data Ahead

Posted: 03 Sep 2012 12:24 AM PDT

Tim Duy:

Employment Data Ahead, by Tim Duy: While the ISM manufacturing report is on the board for Tuesday, the big event for this week is the August employment report. Of course, it is a matter of debate as to what extent the data is important for the next Fed meeting. Many are taking Federal Reserve Chairman Ben Bernanke's description of labor markets as "grave" as a indication that more action is imminent. Atlanta Federal Reserve Chairman Dennis Lockhart, a generally middle-of-the-road policymaker, seems to believe the data are still important. Via the Wall Street Journal:

"It's a close call" when it comes answering the question of whether the Fed should provide more aid to the economy, Federal Reserve Bank of Atlanta President Dennis Lockhart said. He spoke on the sidelines of the Kansas City Fed's annual research conference here.

Mr. Lockhart said that as he tries to determine what, if any, further stimulus should come from the Fed, he was weighing action against the broader trend of economic activity.

"I'm increasingly of the view that we are on a track that you would, to simplify it, would say is about a 2% growth track with fluctuating job growth. But overall, not a strong enough pace to bring down unemployment to anything close to a notion of full employment in a reasonable time," Mr. Lockhart said.

The policy maker said the fundamental question is whether new Fed stimulus could alter this path. "That's a very tough question. I am not highly confident in the ability of simply monetary action to jump-shift the economy onto a different track," Mr. Lockhart said.

This is the key question - can monetary policy jump the economy to another path? More likely than not, this is the question that has prevented additional action to date. Indeed, it is really the only question that makes any sense given the persistent failure of monetary policymakers to meet either the employment or inflation parts of their dual mandate. Interestingly, Lockhart played down Bernanke's speech:

When it comes to additional stimulus, Mr. Bernanke argued "it could help. I think, one, meaning the press or pundits, or observers, can overinterpret the speech as being, as indicating, his preference for further action," Mr. Lockhart said. "I don't think [Mr. Bernanke] signaled or indicated a particular direction.

It seems Lockhart agrees with my hesitation in embracing Bernanke's speech as a clear indication of the Fed's next policy move. What is promising, in my opinion, is the recognition that if the Fed is going to act, they need to act in a way that will shift the existing paradigm:

If the Fed were to act, Mr. Lockhart said half-measures would not get the job done. While he didn't state what the steps could be, he said stimulus, if chosen, should be "a package. When I say package that means two or three things done at the same time to create maximum possible gains."

Not only does this speak to open-ended quantitative easing, but also communication tools, such as extending the period of expected low rates and quantitative targets for policy.

Also in the news was St. Louis Federal Reserve James Bullard. He would like to wait for more data, but sees which way the wind is blowing:

Mr. Bullard said "it's clear we have an easing bias," but he also noted recent data have improved. He said he'd also like to see how the August employment report–due next Friday–turns out before deciding what's appropriate for the Fed.

Mr. Bullard said he's willing to be patient and collect more data before acting. But he also said given the current consensus on the committee, "I'd be open to some action"–as long as it was a "relatively smaller move." He explained the trajectory of recent data doesn't "justify the large policy moves" associated with bond-buying programs that expanded the central bank's balance sheet.

The comments on the size of any additional move are interesting in context of his next quote:

If the Fed were to adopt at some point a new asset-buying program, he said he'd prefer that it be open-ended and adjusted on a meeting-by-meeting basis, as opposed to adopting a preset size and end date for the purchases. A flexible bond-buying effort would be "the natural way" to go, and "maybe this way will be the charm if we decided to go that way," Mr. Bullard said.

I am not sure if market participants have fully come to terms with the concept of open-end quantitative easing. There may be some disappointment if market participants expect a new program will come with a big number, which is my interpretation of Bullard's comment on "large policy moves." Most likely, it will be a small number - something like a commitment to expand the balance sheet by $10 billion a week until conditions justify tightening. A stronger version would be to tie the steady expansion to specific macroeconomic objectives. An even stronger version would be to commit to the program even in the event of inflation in excess of the current 2% target. But my point here is that we should be prepared for an open-ended program to come attached with a number that may be small compared with QE1 and QE2.

FYI - in contrast to Bullard, I think an open-ended program would be a large policy move, even if the numbers appeared small.

Bullard also claims to be more sympathetic to charging interest on reserves, a negative interest rate. I don't know that this idea has much other traction at this point.

Bottom Line: If we believe Lockhart, Bernanke's speech was less of a signal than the general consensus would believe. But if we believe Bullard, the FOMC is moving in the direction of additional easing in any event. Greater than 50% odds, but still a close call? Sounds about right. The employment report could ramp the odds up to 80%, or push us back to the break even point. If they do move, I am expecting an open-ended quantitative easing coupled with a communication tools. Note that an open-ended program is not likely to include a big number. The point of the open-ended program, however, is that it can get big, very big, if needed.

Links for 09-03-2012

Posted: 03 Sep 2012 12:06 AM PDT

'Arguments for Ending the Microfoundations Hegemony'

Posted: 02 Sep 2012 02:45 PM PDT

Simon Wren-Lewis lists and discusses five arguments for abandoning the microfoundations approach to macro modeling, and instead modeling economic relationships at the aggregate level, and then remarks:

While this post lists all the reasons why sometimes starting with aggregate models would be a good idea, I find it much more difficult to see how what I suggest might come about. Views among economists outside macro, and policy makers, about the DSGE approach can be pretty disparaging, yet it is unclear how this will have any influence on publications in top journals. The major concern amongst all but the most senior (in terms of status) academic macroeconomists is to get top publications, which means departing from the DSGE paradigm is much too risky. Leaders in the field have other outlets when they want to publish papers without microfoundations (e.g. Michael Woodford here).
Now if sticking with microfoundations meant that macroeconomics as a whole gradually lost relevance, then you could see why the current situation would become unsustainable. Some believe the recent crisis was just such an event. While I agree that insistence on microfoundations discouraged research that might have been helpful during and after the crisis, there is now plenty of DSGE analysis of various financial frictions (e.g. Gertler and Kiyotaki here) that will take the discipline forward. I think microfoundations macro deserves to be one of, if not the, major way macro is done. I just do not think it is the only route to macroeconomic wisdom, but the discipline at the moment acts as if it is.

I've made a similar argument, e.g. "we need to push the DSGE structure as far as we can and see if it can be satisfactorily amended. Ask the right questions, and use the tools and techniques associated with modern macro to try to build the right models. But it's not at all clear that the DSGE methodology is up to the task, so let's not close our eyes -- or worse actively block -- the search for alternative theoretical structures."

Romney=Bush

Posted: 02 Sep 2012 10:29 AM PDT

Huh? Bush wasn't even invited to speak at his own Party's convention:

Fewer than four years after George W. Bush left office, his team members are back in high places, their reputation is being reconsidered, and the Bush name is regaining its old luster and then some.

But it is interesting to read how thoroughly Romney has embraced Bush advisors:

Particularly striking is the degree to which Bush 43 foreign policy players have assumed leading roles in shaping policy for Romney.

Oh boy, more wars. And this is reassuring:

Cofer Black, a former top executive at the Bush-era security contractor once called Blackwater, is a top adviser to Romney on intelligence issues, shaping his views on subjects such as interrogations of terrorism suspects.

Reading that is tortuous. It's not just Romney, it's Ryan too:

And Dan Senor, who was a top official in the Coalition Provisional Authority in Iraq in the year after the invasion, is now at the right hand of vice presidential nominee Paul Ryan. Senor was also cited as one of the influential thinkers behind some of Romney's controversial comments during his trip to Israel, when he said the innate superiority of Israeli culture is one reason the Israelis are doing better economically than the Palestinians.

So Romney and Ryan are taking Bush policies to heart, and trying to hide it from voters:

Barack Obama was swept into the presidency four years ago in part because of his explicit rejection of Bush's policies. The Bush vision of an America unhesitant to impose its will with or without international support had cost the country too much in lives, resources and international standing, and the neocons and other top Bush figures had fallen into disrepute, perhaps never to be heard from again. But now they're out of the wilderness — and finding homes in the Romney campaign.

They may be finding homes in the campaign, but they are being hidden in closets lest people figure out the degree to which Romney is embracing Bush. And I don't think this is correct:

Even Dubya himself has begun to get more respect, whether it is MSNBC's Joe Scarborough saying that Bush was more direct and principle-driven than Romney, or a senior diplomat from the developing world telling me recently that "we miss Bush. You knew where he stood.

I view that as more of an indictment of Romney -- he's worse than Bush -- than a rehabilitation of the former president's reputation. I'm not sure this is correct either:

the rebound for Bush and his team has been uncommonly and surprisingly fast. And while the dubious case for the war in Iraq, Abu Ghraib, Guantanamo and the Patriot Act still stir deserved resentment and criticism in many circles, apparently people have begun to forgive, even before they have had time to forget.

As far as I could tell, Republicans ran from these issues at the convention (too bad, because they need to be discussed -- Democrats won't raise them either), and they are still running from Bush. It seems to me that Bush only looks better in comparison to Romney because Romney has fallen in their eyes. But maybe it's correct that Republicans are forgiving Bush, and I'll look forward to them making him a prominent part of the Romney campaign. Voters will surely love that.

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