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February 4, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 05 Dec 2012 12:33 AM PST
Antonio Fatas reacts to the Republican counterproposal on the budget:
Planning for (fiscal) miracles, by Antonio Fatas: The debate in the US about how to deal with the "fiscal cliff" has produced a counterproposal by the Republicans on how to avert a crisis. The proposal is criticized by many because of its lack of details (see here, here, here and here). The way the proposal avoids dealing with the real issues and suggests solutions that do not impose a cost on anyone reminds me of some of the debates in Europe about finding a plan to deal with Greek government debt or the capitalization of Spanish banks. In all these cases you hear proposals that seem to generate resources without anyone having to pay for them. Republicans in the US want to raise revenues without increasing tax rates, cutting spending without really cutting it. And the Spanish government will bailout banks without imposing any cost on taxpayers. In some cases these proposal have no logic in others there is some logic but a lot of wishful thinking that generates economic miracles. ...
Posted: 05 Dec 2012 12:24 AM PST
Tim Duy:
Monetary Policy to Become Easier Next Week?, by Tim Duy: There are two important issues to be discussed at next week's FOMC meeting. One is the issue of specific thresholds as future policy guides. The second is the replacement for Operation Twist. Clearly, support is building for specific thresholds, and I believe policymakers will work out the details within the next meeting or two. Also, I think the general sense is that the Fed will continue to purchase long-term Treasuries after Operation Twist is complete. But will they continue to purchase the full $45 billion a month? That seems like it should be an open question, but it looks like momentum is building in that direction.
St. Louis Federal Reserve President James Bullard offered his thoughts on both these topics yesterday. On the first point, he offers support for replacing the forward guidance with a set of thresholds. I don't find this to be surprising. Bullard has never been a huge fan of the time commitment implied in the current statement. Not only does it send a pessimistic signal about the economy, in theory it should respond more flexibly to evolving economic events. But in practice, the Fed is only willing to alter the date in the event of a substantial shift in the economic outlook.
Bullard cites the 6.5/2.5 unemployment/inflation thresholds recently described by Chicago Federal Reserve President Charles Evans. I am not sure that Bullard specifically endorses these figures, but he may sense the political wind is blowing in that direction. He nicely describes six challenges to a threshold regime:
  1. The Fed needs to make clear that in the long-run the Fed cannot target unemployment.
  2. He believes the threshold should be on actual outcomes, not forecasts.
  3. The Fed needs to communicate that policy is about more than just two variables. For example, he suggests the possibility of raising interest rates to limit asset price bubbles.
  4. Unemployment is not the only measure of the labor market. The Fed takes a broader view of labor markets into consideration.
  5. Unemployment can remain high, such as in Europe (I think this is really just a restatement of point one).
  6. Beware that thresholds will be viewed as triggers, which they are not.
I think these are valid concerns the Fed needs to address as the communication strategy evolves. Bullard then shifts gears to Operation Twist. Currently, large scale asset purchases come in two flavors. One is $40 billion a month in outright mortgage purchases (QE3), the other a monthly swap of $45 billion in short-term Treasuries for an equal amount of long-term Treasuries (Operation Twist). The former is open-ended, the latter concludes this month. Should it be fully converted to an outright asset purchase program? San Francisco Federal Reserve President John Williams gave his opinion last month:
Meeting with reporters following a speech at the University of San Francisco, MNI asked Williams whether he thinks the FOMC should replace the Operation Twist Treasury purchases dollar for dollar upon their expiration Dec. 31. He answered strongly in the affirmative.
"My view is based on the expectation that we won't see substantial improvement in the labor market" for awhile, Williams said, adding that therefore "my view is that we should continue with purchases of long-term Treasuries after December into next year."
Williams said he favors "just purely buying long-term Treasuries at the rate we're buying."
Asked to clarify, Williams said he favors buying MBS and Treasuries "at the same rate we're doing now" -- $85 billion per month.
Boston Federal Reserve President Eric Rosengren agreed yesterday. Operation Twist changes the composition of the balance sheet, not its size. If the Fed converts to an outright asset purchase program, they will more than double the pace of net purchases. In my opinion, this appears to be a substantial easing of policy. Bullard feels similarly:
...on balance I think it is reasonable to think that an outright purchase program has more impact on inflation and inflation expectations than a twist program....
...Replacing the expiring twist program one-for-one with outright purchases of longer-dated Treasuries is likely more dovish than current policy.
I think that is correct; the conversion of Operation Twist should be considered a more aggressive policy. Yet inflation expectations (with the usual caveats about TIPS based expectations) continue to wane:
Perhaps financial market participants do not expect the Fed to commit to the full $85 billion in purchases. But this does not seem to be the case. There has been more than enough Fedspeak to suggest that additional easing is coming. Which leads me again to wonder if monetary policy is now at full throttle? $40, $50, or $85 billion a month. Does it make a difference? Or is the expectation of additional easing simply offsetting expectations of tighter fiscal policy?
Bottom Line: The Fed is gearing up to convert Operation Twist to an outright purchase program. A complete conversion should be considered a more aggressive policy stance. If the Fed wants to hold policy constant, then we would expect a less than one-for-one conversion. There are reasons to expect the Fed would go the full monty. Notably, the fiscal cliff drama already appears to be affecting the economy, even though it is more risk than reality. But why are inflation expectations sliding? And what does that imply about the effectiveness of additional easing at this juncture? Important but as of yet unanswered questions.
Posted: 05 Dec 2012 12:06 AM PST
Posted: 04 Dec 2012 12:36 PM PST
Kenneth Rogoff says our troubles may last awhile but thye aren't permanent:
Innovation Crisis or Financial Crisis?, by Kenneth Rogoff, Commentary, Project Syndicate: As one year of sluggish growth spills into the next, there is growing debate about what to expect over the coming decades. Was the global financial crisis a harsh but transitory setback to advanced-country growth, or did it expose a deeper long-term malaise?
Recently, a few writers, including internet entrepreneur Peter Thiel and political activist and former world chess champion Garry Kasparov, have espoused a fairly radical interpretation of the slowdown. In a forthcoming book, they argue that the collapse of advanced-country growth is not merely a result of the financial crisis; at its root, they argue, these countries' weakness reflects secular stagnation in technology and innovation. As such, they are unlikely to see any sustained pickup in productivity growth without radical changes in innovation policy.
Economist Robert Gordon takes this idea even further. ...
These are very interesting ideas, but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis. ...
Attributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects, some of which are rooted in the crisis itself. ... Taken together, these factors make it easy to imagine trend GDP growth being one percentage point below normal for another decade, possibly even longer. ..
So, is the main cause of the recent slowdown an innovation crisis or a financial crisis? Perhaps some of both, but surely the economic trauma of the last few years reflects, first and foremost, a financial meltdown...
Posted: 04 Dec 2012 10:12 AM PST
pgl highlights the Heritage Foundation's response to the Republican budget proposal (though I fear calling it a proposal gives it more credit than it deserves:
Heritage Foundation on the Republican Offer on the Fiscal Cliff: ...let's turn to Alison Acosta Fraser and J.D. Foster of the Heritage Foundation:
To be fair, the details of the Republican proposal are extraordinarily vague. Nor is much clarity or comfort gained from the three-page accompanying letter sent to the President and signed by Speaker John Boehner (R-OH), Majority Leader Eric Cantor (R-VA), House Budget Committee Chairman Paul Ryan (R-WI), and three other senior members of the House Republican leadership.
...notice that the folks at the Heritage Foundation fear that the Republicans are engaged in "categorical, pre-emptive capitulation". After all, they prefer that we slash and burn Social Security, Medicare, and Medicaid so as to avoid raising taxes on the very well to do. Not that I agree with their agenda in the slightest – but at least the folks at the Heritage Foundation are a lot clearer about the Republican agenda than is the Speaker of the House.
[On another note, reinforcing the message in my column today on why republicans won't admit supply-side economics has failed, here's the title of a column by Diana Furchtgott-Roth of the Manhattan Institute: Cut Tax Rates, Boost Tax Revenues. It says "Republicans ... want lower tax rates, which, they predict, will lead eventually to higher revenues." They just can't give this up.]

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