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February 4, 2013

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 07 Jan 2013 02:49 AM PST
Who should be blamed for the slow recovery?:
The Big Fail by Paul Krugman, Commentary, NY Times: It's that time again: the annual meeting of the American Economic Association and affiliates... And this year, as in past meetings, there is one theme dominating discussion: the ongoing economic crisis.
This isn't how things were supposed to be. If you had polled the economists attending this meeting three years ago, most of them would surely have predicted that by now we'd be talking about how the great slump ended, not why it still continues.
So what went wrong? The answer, mainly, is the triumph of bad ideas.
It's tempting to argue that the economic failures of recent years prove that economists don't have the answers. But the truth is ... standard economics offered good answers, but political leaders — and all too many economists — chose to forget or ignore what they should have known. ...
A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn't nearly enough.
At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen... Budget deficits rose, but this was actually a good thing, probably the most important reason we didn't have a full replay of the Great Depression.
But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day...
Of the papers presented at this meeting, probably the biggest flash came from one by Olivier Blanchard and Daniel Leigh of the International Monetary Fund. ... For what the paper concludes is not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake. ...
The really bad news is ... European leaders ... still insist that the answer is even more pain. ... And here in America, Republicans insist that they'll use a confrontation over the debt ceiling ... to demand spending cuts that would drive us back into recession.
The truth is that we've just experienced a colossal failure of economic policy — and far too many of those responsible for that failure both retain power and refuse to learn from experience.
Posted: 07 Jan 2013 02:30 AM PST
Posted: 06 Jan 2013 09:48 AM PST
I took three days to drive down the coast of Oregon and California on the way to the ASSA meetings in San Diego -- sort of a needed break that seemed to only put me further behind -- but I only have one day to get back, today. It's going to be a long, long day, so just a few quick posts before hitting the road:
Apparently, there's a petition circulating in support of this:
Why Paul Krugman should be President Obama's pick for US treasury secretary, by Mark Weisbrot: President Obama hasn't picked a treasury secretary yet for his second term, so he has a chance to do something different.
He could ignore what Wall Street and conservative media interests want and pick somebody who would represent what the electorate voted for. ... I know what you are thinking: this is impossible. There is too much money and power on the other side of this idea. Well, maybe.
But Obama has surprised us before. Last June, he picked Jim Kim to run the World Bank. ... So, for the post of treasury secretary, to replace the outgoing Tim Geithner, Obama could afford to make another bold choice: Paul Krugman.
Krugman would be tough to oppose on any substantive grounds. He has a Nobel Prize in economics (also the John Bates Clark award for best economist under 40). The New York Times columnist is probably the best-known living economist in the United States, and perhaps the world.
Krugman has been right about the major problems facing our economy, where many other economists and much of the business press have been wrong. ... Most importantly, Krugman is on the side of the majority of Americans. ... After all, why should the secretary of the treasury have to prioritize the interests of Wall Street and the "criminal enterprise" of big finance...
The US treasury secretary also has an important influence on the rest of the world, as the most powerful force within the IMF, G20, and G7 groupings. Krugman has written extensively about the stupidity of the last few years of economic policy in Europe...
Imagine a treasury secretary who favored employment, poverty reduction and development, rather than unnecessary austerity...
It would be great to have a treasury secretary who can cut through all that crap. ...
The renowned actor and human rights activist Danny Glover has launched a petition to the president for him to nominate Paul Krugman for secretary of the treasury. It's worth signing.
When Paul Krugman hears about this (I predict) he will tell us all the reasons why he'd be lousy at this job (as he's done before with similar suggestions).
Posted: 06 Jan 2013 09:48 AM PST
Dean Baker:
The Blame the Community Reinvestment Act Industry, by Dean Baker (Creative Commons License): One of the major occupations for economists these days is blaming efforts to help poor people for the housing bubble and bust. The main villains in this story are Fannie Mae, Freddic Mac, the Federal Housing Authority (FHA) and the Community Reinvestment Act (CRA). A reader recently sent me another work in this proud tradition.
I just did a quick reading of the paper, but it seems that the smoking gun in this one is that banks subject to the CRA appeared to do more lending in CRA tracts in the periods where their lending behavior was being scrutinized by regulators. Just to remind folks, the CRA requires banks to make loans in the areas from which they were taking deposits, in particular focusing on areas that are disproportionately African American or Hispanic. The authors take this timing result, which is especially pronounced in the peak bubble years of 2004-2006, as evidence that the CRA played a major role in the pushing of bad loans on moderate income people. As they note, the loans issued in these tracts in these periods had a much higher default rate than other loans.
It's not clear that this gun is smoking quite as much the paper implies. First, it is important to remember that the biggest peddlers of subprime loans were mortgage lenders like Ameriquest and Countrywide. These lenders were for the most part not subject to the CRA since they were not banks (they raised money through the capital markets, not by taking deposits). Therefore the CRA was not a gun to the head of these lenders forcing them to make bad loans.
However even for the banks to whom the CRA did apply the evidence in this paper is less compelling than it may seem. Let's assume that banks do care about their CRA ratings for the reasons mentioned in the paper. (The CRA rating would likely be a factor that would come up when a bank was interested in a buyout or merger.) Let's also imagine that banks time their loans to CRA tracts so that they can show more loans in the periods where their compliance is being reviewed. Let's also hypothesize that in total the CRA doesn't get banks to make any more loans to CRA tracts than they would otherwise.
In this case, we would get exactly the sort of pattern of lending found in this study. Banks that are subject to the CRA would refrain from focusing on CRA tracts when they know no one is looking. Then when the light is on, they would make a stronger effort to make loans in the neighborhoods covered by the CRA. If banks engaged in this sort of timing of loans to CRA tracts, we would find that loans during CRA review periods were higher than in other times, even if there was no net increase in loans as a result of the CRA.
As a practical matter, I would be surprised if the CRA had no effect whatsoever on lending to the covered tracts. But it's not clear how this paper can distinguish a timing effect from a situation where banks actually increased lending to CRA tracts beyond what they would have done without the law.
In the process of prosecuting the case against the CRA, the paper produces some exonerating evidence for Fannie and Freddie. It finds that the CRA effect was strongly associated with private securitization because the investment banks had lower standards than Fannie and Freddie. It comments on this finding:
"We conjecture that banks are more likely to originate loans to risky borrowers around CRA examinations when they have an avenue to securitize and pass these loans to private investors after the exam."
And, just to remind folks, the FHA became almost irrelevant in the peak bubble years, with its share of the market dwindling to almost nothing. At the time it was derided as an outmoded relic since the private sector was so much more efficient in providing loans to low and moderate income families.
Anyhow, I don't think there is any doubt that the efforts to push homeownership went seriously awry in the bubble years. Many of the organizations that encouraged moderate income families to buy homes at badly inflated prices as a wealth building strategy should be wearing bags over their heads for the next three decades. But there is no escaping the fact that the main motivation for issuing the bad mortgages was money: the banks were booking huge profits in these years. And no believer in the free market can think that bankers have to be told by government bureaucrats to go out and make money.
Posted: 06 Jan 2013 09:47 AM PST
I spent quite a bit of time with Noah Smith at the ASSA meetings. At one point, we were at the St. Louis Fed reception and -- since he has no fear -- I suggested that he tell Randall Wright how well New Keynesian models work, which he did. I assumed he'd get a strong taste of the divide in macroeconomics:
Is economics divided into warring ideological camps?, by Noah Smith: This week I went to the American Economic Association's annual meeting, which was held in sunny San Diego, CA. I went to quite a number of interesting sessions, mostly on behavioral economics and finance. What an exciting field!
But anyway, I also went to an interesting session called "What do economists think about major public policy issues?" There were two papers presented, both of which were extremely relevant for much of the debate going on in the econ blogosphere.
The first paper, by Roger Gordon and Gordon Dahl of UC San Diego (aside: now I want to co-author with a guy whose last name is "Noah"!), was called "Views among Economists: Professional Consensus or Point-Counterpoint?" Gordon & Dahl surveyed 41 top economists about their views on 81 policy issues, and tried to determine A) how much disagreement there was, and B) how much disagreement was due to political ideology.
They found that top economists agree about a lot of things. ... On some other issues, opinion was all over the place. Gordon and Dahl also found that the differences that did exist couldn't easily be tied to individual characteristics like gender, experience working in Washington, etc. A panel discussant, Monika Piazzesi, did some further statistical analysis to show that the surveyed economists didn't clump up into "liberal" and "conservative" clusters. 
Conclusion: Economics, at least at the elite level, isn't divided into two warring ideological camps.
That doesn't mean there is no politicization. Justin Wolfers ... ranked the 41 top economists on a liberal/conservative scale according to his own intuition, and found that the economists he intuitively felt were liberal were more likely to support fiscal stimulus, and the conservatives less. He found a few other seemingly partisan differences this way, though not many. (Of course, one has to be careful with this type of analysis; if your ideas of who's "liberal" and who's "conservative" are formed by who supports stimulus and who opposes it, then of course you're going to see this type of effect!)
And of course, it's worth noting that the survey had a small sample, and included only "top" economists at major U.S. universities. There might be "long tails" of ideological bias lower down the prestige scale.
Paul Krugman, who was on the panel, suggested that politicization is mostly confined to the macro field. But even on the question of stimulus, most of the surveyed economists (80%) agreed that Obama's 2009 stimulus boosted output and employment (though fewer agreed that this boost was worth the long-term costs). So it seems that the few top economists who a few years ago were loudly saying that stimulus couldn't possibly work - Bob Lucas, Robert Barro, Gene Fama, etc. - were just a very vocal small minority.
These results surprised me. I'm so used to seeing top macroeconomists tangling with each other... And I had often heard that the appeal of certain classes of macro models - for example, RBC - came from their conservative policy implications. 
So maybe I've been wrong all this time! Or maybe there was more politicization of macro back in the 70s and 80s? 
Or maybe there is still politicization, but the economics profession has just shifted decisively to the center-left? After all, as of 2012, the consensus favorite modeling approach among pure macro people seems to be New Keynesian models of the type preferred by Krugman, not RBC-type models of the type supported by Bob Lucas, Robert Barro, and other "new classical" economists back in the 1980s. It could be that nowadays most economists are - as one person on the panel put it - "market-hugging Democrats". (Or it could be that New Keynesian models simply won the war of ideas. Or both.)
I'm not sure, but Gordon & Dahl's paper is definitely making me question my beliefs...

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