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February 4, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 10 Jan 2013 12:06 AM PST
Posted: 09 Jan 2013 01:54 PM PST
From an interview of MIT's Andrew Lo:
Q: Many people believe that the financial crisis revealed major shortcomings in the discipline of economics, and one of the goals of your book is to consider what economic theory tells us about the links between finance and the rest of the economy. Do you feel that economists understand enough about the nature of financial instability or liquidity crises?
A: I think that the financial crisis was an important wake-up call to all economists that we need to change the way we approach our discipline. While economics has made great strides in modeling liquidity risk, financial contagion, and market bubbles and crashes, we haven't done a very good job of integrating these models into broader macroeconomic policy tools. That's the focus of a lot of recent activity in macro and financial economics and the hope is that we'll be able to do better in the near future.
Q: Let me continue briefly on this thread. One topic has been particularly controversial concerns the efficient-market hypothesis (EMH). Burton Malkiel discusses the issue in his chapter in Rethinking the Financial Crisis, but I wanted to ask your opinion of this idea that EMH fed a hands-off regulatory approach that ignored concerns about faulty asset pricing.
A: There's no doubt that EMH and its macroeconomic cousin, Rational Expectations, played a significant role in how regulators approached their responsibilities. However, we should keep in mind that market efficiency isn't wrong; it's just incomplete. Market participants do behave rationally under normal economic conditions, hence the current regulatory framework does serve a useful purpose during these periods. But during periods of extreme growth and decline, human behavior is not the same, and much of economic theory and regulatory policy does not yet reflect this new perspective of "Adaptive Markets."
Posted: 09 Jan 2013 12:25 PM PST
Shane Greenstein:
The FTC and Google: What did Larry Learn?, by Shane Greenstein: The FTC and Google settled their differences last week, putting the final touches on an agreement. Commentators began carping from all sides as soon as the announcement came. The most biting criticisms have accused the FTC of going too easy on Google. Frankly, I think the commentators are only half right. Yes, it appears as if Google got off easy, but, IMHO, the FTC settled at about the right place.
More to the point, it is too soon to throw a harsh judgment at Google. This settlement might work just fine, and if it does, then society is better off than it would have been had some grandstanding prosecutor decided to go to trial.
Why? First, public confrontation is often a BIG expense for society. Second, as an organization Google is young and it occupies a market that also is young. The first big antitrust case for such a company in such a situation should substitute education for severe judgment.
Ah, this will take an explanation. ...
Posted: 09 Jan 2013 09:10 AM PST
The editors at MoneyWatch asked me to answer the question:
What can Washington do to Boost the Recovery?: As we enter the new year, the nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low. At the present rate of job growth, we are still several years away from full employment.
Monetary and fiscal policymakers could accelerate the return to full employment through tax cuts, increases in government spending -- particularly in areas that tend to create lots of jobs -- and further monetary easing. However, the ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government. ...[continue reading]...
Policymakers are unlikely to do more to help the economy recover, the question is whether fear of deficits and fear of inflation will cause them to adopt policies that make it worse.
Posted: 09 Jan 2013 08:57 AM PST
Tim Duy:
What's Good For the Goose...?, by Tim Duy: Via a tweet from Edward Harrison, Germany is preparing secret plans - not so secret anymore - to implement a wide-ranging austerity program after the elections. From Spiegel:
The government in Berlin is living in a dual reality. Strategists in the center-right coaliton parties are planning to enhance benefits for families, pensioners and the long-term unemployed in a bid to woo voters in the upcoming elections.
By contrast, due to the economic slowdown, experts in Schäuble's ministry are anticipating an entirely different scenario: The next government -- no matter who will be chancellor and which parties will be in power -- won't be able to boost spending. Instead, it will have to impose rigorous spending restraint.
According to the recommendations made by Schäuble's team...Germany will have to drastically increase taxes and make painful cuts in social services over the coming years.
These ideas don't fit with the current political climate in Germany...Schäuble nevertheless feels that his experts' forecasts are realistic. He has expressly approved their proposals and ordered them to continue to work on the cost-cutting program. At the same time, he has ordered strict secrecy to avoid any adverse effects on his party's campaigns for the upcoming state election in Lower Saxony in January and the general election in the fall of 2013.
Speigel describes Schäuble's plan as:
...nothing less than the most comprehensive austerity program in postwar German history.
But most amazing is the appeal to pro-cyclical fiscal policies:
The proposals from Schäuble's ministry serve to tighten a regulation that has only been enshrined in the German constitution for the past few years: the so-called debt brake, which calls for the German federal government to "maintain a nearly balanced budget" starting in 2016.
The government will still be able to take out loans to some extent. In 2016, for instance, it will be allowed to borrow some €10 billion. However, Schäuble and his staff say that Germany should not completely exhaust this scope for borrowing. They want a safety buffer...
One of the examples that they cite is "a sharp economic downturn." If the economy collapses, as it did in the wake of the financial crisis in 2009, experience has shown that public coffers come under considerable pressure...
This can have a devastating impact on state finances. Following the most recent recession, government debt soared from 65 to nearly 83 percent of gross domestic product (GDP). Schäuble's experts say that the country cannot withstand another similar increase in public debt and conclude that it's time to take appropriate countermeasures.
Attempting to control, or even reduce, a fiscal deficit as an economy slips into recession is economic suicide, yet that appears to be the only path European policymakers know. Indeed, part of the "need" for this austerity plan is the theory that what is good for the goose is good for the gander:
The paper by the Finance Ministry officials contains a further admission. The next finance minister will have to make up for what Schäuble has failed to accomplish. Merkel's most important minister forced half of Europe to submit to austerity measures while the Germans were spending money hand over fist at home.
In short, Germany looks set to further entrench the Continent's move toward an "austerity union," not a fiscal union, condemning the people of Europe to weak growth and high unemployment. And, as a reminder, the path of interest rates in Germany:
Absolutely no reason to think that a massive austerity plan is necessary. Completely opposite of the spike in rates that followed the 1990 reunification. Then spending control was needed in the wake of increased expenses to combine the East and the West. But interest rates are clearly indicating that completely opposite policies are now in order. Apparently policymakers only listen to the signals of the currently nonexistent bond market vigilantes.
Bottom Line: German plans for further austerity indicate that fiscal policy remains a downside risk for the European economy.

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