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November 28, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Hurricane Sandy’s Lesson on Preserving Capitalism

Posted: 06 Nov 2012 12:33 AM PST

We are, as they say, live:

Price-gougingHurricane Sandy's Lesson on Preserving Capitalism: With long gas lines and other shortages putting people on edge in the wake of Hurricane Sandy, the usual post-disaster debate over the economics and ethics of price-gouging is underway.  However, while the question of whether it is okay, even desirable, for businesses to raise prices after natural disasters is certainly important, there is a larger lesson that can be drawn from this debate. ...

The lesson is about when support for price-allocation systems -- the heart of capitalism -- breaks down. More here.

'Four Top Economists Huddled Round a Lunch Table'

Posted: 06 Nov 2012 12:24 AM PST

Aditya Chakrabortty:

...As one of the 10 most expensive private colleges in the US, Carnegie Mellon in Pittsburgh almost oppresses visitors with neo-gothic grandness... I was a guest of Carol Goldburg, the director of CMU's undergraduate economics program, who had gathered a few colleagues to give their take on the presidential election. Here were four top economists huddled round a lunch table: they were surely going to regale me with talk of labor-market policy, global imbalances, marginal tax rates.
My opener was an easy ball: how did they think President Obama had done? Sevin Yeltekin, an expert on political economy, was the first to respond: "He hasn't delivered on a lot of his promises, but he inherited a big mess. I'd give him a solid B."
I threw the same question to her neighbor and one of America's most renowned rightwing economists, Allan Meltzer. He snapped: "A straight F: he took a mess and made it even bigger." Then came Goldburg, now wearing the look of a hostess whose guests are falling out: "Well, I'm concerned about welfare and poverty, and Obama's tried hard on those issues." A tentative pause. "B-minus?"
Finally it was the turn of Bennett McCallum, author of such refined works as Multiple-Solution Indeterminacies in Monetary Policy Analysis. Surely he would bring the much-needed technical ballast? Um, no. "D: he's trying to turn this country into France."
Some of these comments were surely made for the benefit of their audience: faced with a mere scribbler, the scholars had evidently decided to hold the algebra, and instead talk human. Even so, this was a remarkable row. Here were four economists on the same faculty, who probably taught some of the same students; yet Obama's reputation depended on entirely on who was doing the assessment. The president was either B or F, good or a failure: opposite poles with no middle ground, and not even a joint agreement of the judging criteria. ...

Links for 11-06-2012

Posted: 06 Nov 2012 12:06 AM PST

'Macro Manners'

Posted: 05 Nov 2012 05:58 PM PST

How rude is too rude? Paul Krugman answers:

... It wasn't nice to characterize the doctrine of expansionary austerity as belief in the confidence fairy, but I do believe that it focused the discussion in a way that a less caustic approach would not have achieved. ...

[W]riting effectively requires that you have a voice, that the passion shows... Obviously no four-letter words — and while I may sometimes envy Matt Taibbi his vampire squid, rudeness in my part of the commentariat has to be within certain bounds. But pretending to respect views that you don't isn't, and shouldn't, be part of the job description for economists trying to grapple with these important issues.

'Managing a Liquidity Trap: Monetary and Fiscal Policy'

Posted: 05 Nov 2012 11:18 AM PST

I like Stephen Williamson a lot better when he puts on his academic cap. I learned something from this:

Managing a Liquidity Trap: Monetary and Fiscal Policy

I disagree with him about the value of forward guidance, though I wouldn't bet the recovery on this one mechanism, but it's a nice discussion of the underlying issues.

I was surprised to see this reference to fiscal policy:

I've come to think of the standard New Keynesian framework as a model of fiscal policy. The basic sticky price (or sticky wage) inefficiency comes from relative price distortions. Particularly given the zero lower bound on the nominal interest rate, monetary policy is the wrong vehicle for addressing the problem. Indeed, in Werning's model we can always get an efficient allocation with appropriately-set consumption taxes (see Correia et al., for example). I don't think the New Keynesians have captured what monetary policy is about.

For some reason, I thought he was adamantly opposed to fiscal policy interventions. But I think I'm missing something here -- perhaps he is discussing what this particular model says, or what NK models say more generally, rather than what he believes and endorses. After all, he's not a fan of the NK framework. In any case, in addition to whatever help monetary policy can provide, as just noted in the previous post I agree that fiscal policy has an important role to play in helping the economy recover.

'The Challenge Now is to Maintain Fiscal Stimuli'

Posted: 05 Nov 2012 10:43 AM PST

Richard Koo:

Explain the disease to help US citizens, by Richard Koo, Commentary, Financial Times: .... Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. ... This is the result of the bursting of debt-financed housing bubbles, which left the private sector with huge debt overhangs ... giving it no choice but to pay down debt or increase savings, even at zero interest rates.
However, if someone is saving money or paying down debt, someone else must be borrowing and spending that money to keep the economy going. ... With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector. ... The challenge now is to maintain fiscal stimuli until private sector deleveraging is completed. ...
...Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.
The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector's unborrowed savings... Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximizing mode. ...

I'm a bit more confident in monetary policy than he is, but to repeat what's been said here many, many times, monetary policy alone is far from enough, and more fiscal policy (e.g. spending on infrastructure) is needed to help the economy recover. It will still take time no matter what we do, there are no quick cures, but policy can still make a difference. (I know this message is repetitive, and that there's little chance of fiscal stimulus actually happening -- I'll be satisfied if Congress keeps its harmful austerity instincts under control and avoids big cuts that would further slow the recovery -- but I believe this is the right policy, and it's worth repeating now and then.)

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