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October 18, 2012

Latest Posts from Economist's View


Latest Posts from Economist's View


'Economists Played a Special Role in Contributing to the Problem'

Posted: 04 Oct 2012 12:24 AM PDT

This is from Andrew Haldane, Executive Director, Financial Stability, Bank of England:

What have the economists ever done for us?, by Andrew G Haldane, Vox EU: There is a long list of culprits when it comes to assigning blame for the financial crisis. At least in this instance, failure has just as many parents as success. But among the guilty parties, economists played a special role in contributing to the problem. We are duty bound to be part of the solution (see Coyle 2012). Our role in the crisis was, in a nutshell, the result of succumbing to an intellectual virus which took hold of the body financial from the 1990s onwards.
One strain of this virus is an old one. Cycles in money and bank credit are familiar from centuries past. And yet, for perhaps a generation, the symptoms of this old virus were left untreated. That neglect allowed the infection to spread from the financial system to the real economy, with near-fatal consequences for both.
In many ways, this was an odd disease to have contracted. The symptoms should have been all too obvious from history. The interplay of bank money and credit and the wider economy has been pivotal to the mandate of central banks for centuries. For at least a century, that was recognized in the design of public policy frameworks. The management of bank money and credit was a clear public policy prerequisite for maintaining broader macroeconomic and social stability.
Two developments – one academic, one policy-related – appear to have been responsible for this surprising memory loss. The first was the emergence of micro-founded dynamic stochastic general equilibrium (DGSE) models in economics. Because these models were built on real-business-cycle foundations, financial factors (asset prices, money and credit) played distinctly second fiddle, if they played a role at all.
The second was an accompanying neglect for aggregate money and credit conditions in the construction of public policy frameworks. Inflation targeting assumed primacy as a monetary policy framework, with little role for commercial banks' balance sheets as either an end or an intermediate objective. And regulation of financial firms was in many cases taken out of the hands of central banks and delegated to separate supervisory agencies with an institution-specific, non-monetary focus.
Coincidentally or not, what happened next was extraordinary. Commercial banks' balance sheets grew by the largest amount in human history. For example, having flat-lined for a century, bank assets-to-GDP in the UK rose by an order of magnitude from 1970 onwards. A similar pattern was found in other advanced economies.
This balance sheet explosion was, in one sense, no one's fault and no one's responsibility. Not monetary policy authorities, whose focus was now inflation and whose models scarcely permitted bank balance sheets a walk-on role. And not financial regulators, whose focus was on the strength of individual financial institutions.
Yet this policy neglect has since shown itself to be far from benign. The lessons of financial history have been painfully re-taught since 2008. They need not be forgotten again. This has important implications for the economics profession and for the teaching of economics. For one, it underscores the importance of sub-disciplines such as economic and financial history. As Galbraith said, "There can be few fields of human endeavor in which history counts for so little as in the world of finance." Economics can ill afford to re-commit that crime.
Second, it underlines the importance of reinstating money, credit and banking in the core curriculum, as well as refocusing on models of the interplay between economic and financial systems. These are areas that also fell out of fashion during the pre-crisis boom.
Third, the crisis showed that institutions really matter, be it commercial banks or central banks, when making sense of crises, their genesis and aftermath. They too were conveniently, but irresponsibly, airbrushed out of workhorse models. They now needed to be repainted back in.
The second strain of intellectual virus is a new, more virulent one. This has been made dangerous by increased integration of markets of all types, economic, but especially financial and social. In a tightly woven financial and social web, the contagious consequences of a single event can thus bring the world to its knees. That was the Lehman Brothers story.
These cliff-edge dynamics in socioeconomic systems are becoming increasingly familiar. Social dynamics around the Arab Spring in many ways closely resembled financial system dynamics following the failure of Lehman Brothers four years ago. Both are complex, adaptive networks. When gripped by fear, such systems are known to behave in a highly non-linear fashion due to cascading actions and reactions among agents. These systems exhibit a robust yet fragile property: swan-like serenity one minute, riot-like calamity the next.
These dynamics do not emerge from most mainstream models of the financial system or real economy. The reason is simple. The majority of these models use the framework of a single representative agent (or a small number of them). That effectively neuters the possibility of complex actions and interactions between agents shaping system dynamics.
The financial system is an archetypical complex, adaptive socioeconomic system – and has become more so over time. In the early years of this century, financial chains lengthened dramatically, system-wide maturity mismatches widened alarmingly and intrafinancial system claims ballooned exponentially. The system became, in consequence, a hostage to its weakest link. When that broke, so too did the system as a whole. Communications networks and social media then propagated fear globally.
Conventional models, based on the representative agent and with expectations mimicking fundamentals, had no hope of capturing these system dynamics. They are fundamentally ill-suited to capturing today's networked world, in which social media shape expectations, shape behavior and thus shape outcomes.
This calls for an intellectual reinvestment in models of heterogeneous, interacting agents, an investment likely to be every bit as great as the one that economists have made in DGSE models over the past 20 years. Agent-based modeling is one, but only one, such avenue. The construction and simulation of highly non-linear dynamics in systems of multiple equilibria represents unfamiliar territory for most economists. But this is not a journey into the unknown. Sociologists, physicists, ecologists, epidemiologists and anthropologists have for many years sought to understand just such systems. Following their footsteps will require a sense of academic adventure sadly absent in the pre-crisis period.

Links for 10-04-2012

Posted: 04 Oct 2012 12:06 AM PDT

The Effects of Medicaid Eligibility

Posted: 03 Oct 2012 12:22 PM PDT

This is from the NBER:
Saving Teens: Using a Policy Discontinuity to Estimate the Effects of Medicaid Eligibility, by Bruce D. Meyer, Laura R. Wherry, NBER Working Paper No. 18309, Issued in August 2012: [Open Link to Paper]: This paper uses a policy discontinuity to identify the immediate and long-term effects of public health insurance coverage during childhood. Our identification strategy exploits a unique feature of several early Medicaid expansions that extended eligibility only to children born after September 30, 1983. This feature resulted in a large discontinuity in the lifetime years of Medicaid eligibility of children at this birthdate cutoff. Those with family incomes at or just below the poverty line had close to five more years of eligibility if they were born just after the cutoff than if they were born just before. We use this discontinuity in eligibility to measure the impact of public health insurance on mortality by following cohorts of children born on either side of this cutoff from childhood through early adulthood. We examine changes in rates of mortality by the underlying causes of death, distinguishing between deaths due to internal and external causes. We also examine outcomes separately for black and white children. Our analysis shows that black children were more likely to be affected by the Medicaid expansions and gained twice the amount of eligibility as white children. We find a substantial effect of public eligibility during childhood on the later life mortality of black children at ages 15-18. The estimates indicate a 13-18 percent decrease in the internal mortality rate of black teens born after September 30, 1983. We find no evidence of an improvement in the mortality of white children under the expansions.

I'll let people connect their own dots, if they think it's appropriate, between who is helped and who is not and the current debate over Medicaid funding.

'Why the US Demonizes Venezuala's Democracy'

Posted: 03 Oct 2012 11:03 AM PDT

Hoping you'll help me sort out the truth about Venezuela. Is this correct?:

Why the US demonises Venezuala's democracy, by Mark Weisbrot, CIF: ...On 30 May, Dan Rather, one of America's best-known journalists, announced that Venezuelan president Hugo Chávez would die "in a couple of months at most." Four months later Chávez is not only alive and campaigning but widely expected to win re-election on Sunday.
Such is the state of misrepresentation of Venezuela,... a journalist can say almost anything about Chávez or his government and it is unlikely to be challenged, so long as it is negative. Even worse, Rather referred to Chávez as "the dictator" – a term that few, if any, political scientists familiar with the country would countenance.
Here is what Jimmy Carter said about Venezuela's "dictatorship" a few weeks ago: "As a matter of fact, of the 92 elections that we've monitored, I would say that the election process in Venezuela is the best in the world." ... But because Washington has sought for more than a decade to delegitimize Venezuela's government, his ... comments went unreported in almost all of the US media. ...
The opposition will probably lose this election not because of the government's advantages of incumbency..., but because the living standards of the majority of Venezuelans have dramatically improved under Chávez..., poverty has been cut in half and extreme poverty by 70%. And this measures only cash income. Millions have access to healthcare for the first time, and college enrolment has doubled, with free tuition for many students. Inequality has also been considerably reduced. By contrast, the two decades that preceded Chávez amount to one of the worst economic failures in Latin America...
In Washington, democracy has a simple definition: does a government do what the state department wants it to do? ... So it is not just Venezuela that regularly comes under fire from the Washington establishment: all of the left and newly independent governments of South America, including Argentina, Ecuador, and Bolivia are in the crosshairs (although Brazil is considered too big to get the same treatment except from the right). ...
But Venezuela is part of a "Latin American spring" that has produced the most democratic, progressive, and independent group of governments that the region has ever had. They work together, and Venezuela has solid support among its neighbors. This is the former president of Brazil, Lula da Silva, last month: "A victory for Chávez is not just a victory for the people of Venezuela but also a victory for all the people of Latin America … this victory will strike another blow against imperialism."
South America's support is Venezuela's best guarantee against continuing attempts by Washington – which is still spending millions of dollars within the country in addition to unknown covert funds – to undermine, delegitimize, and destabilize democracy in Venezuela.

'Middle-Skill Jobs Are Lagging'

Posted: 03 Oct 2012 09:45 AM PDT

While I search for something to post/talk about, a note on the declining middle class:

Middle-Skill Jobs Are Lagging, by Michael S. Derby: ...A report released Monday by the Federal Reserve Bank of New York puts some numbers behind the evolution of the work force. The report found that from 1980 until 2010, job growth happened "disproportionately" at the high and low ends of skill levels.
The middle-skilled jobs lost in recessions haven't been recovered in rebounds. Meanwhile, low- and high-skill jobs don't lose any notable ground during downturns and grow in better times. That means the pain of recessions is felt almost exclusively in the middle of the skills curve, the report noted.
Who makes up the ... medium-...skilled workforce? ...The broad swath of middle-level-skill jobs includes repair, construction, factory, office and sales workers, among other classes. ...
In a refrain common to the broader Federal Reserve view on the problem, the paper's authors argue policymakers need to find a way to promote education as a way to navigate the changing environment created by technology. "Given the reduction in opportunities for middle skill workers, it is especially important to help people build the skills necessary to take on the high-skill jobs that these forces can create," the report said.

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