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January 31, 2014

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Paul Krugman: Talking Troubled Turkey

Posted: 31 Jan 2014 12:24 AM PST

Do "we now have a world economy destined to seesaw between bubbles and depression"?:

Talking Troubled Turkey, by Paul Krugman, Commentary, NY Times: O.K., who ordered that? With everything else going on, the last thing we needed was a new economic crisis in a country already racked by political turmoil. True, the direct global spillovers from Turkey, with its Los Angeles-sized economy, won't be large. But we're hearing that dreaded word "contagion"...
It is, in many ways, a familiar story. But that's part of what makes it so disturbing: Why do we keep having these crises? And here's the thing: The intervals between crises seem to be getting shorter, and the fallout from each crisis seems to be worse than the last. What's going on?...
You may or may not have heard that there's a big debate among economists about whether we face "secular stagnation"..., a situation in which the amount people want to save exceeds the volume of investments worth making.
When that's true, you have one of two outcomes. If investors are being cautious and prudent, we are collectively, in effect, trying to spend less than our income,... the result is a persistent slump.
Alternatively, flailing investors — frustrated by low returns and desperate for yield — can delude themselves, pouring money into ill-conceived projects, be they subprime lending or capital flows to emerging markets. This can boost the economy for a while, but eventually investors face reality, the money dries up and pain follows.
If this is a good description of our situation, and I believe it is, we now have a world economy destined to seesaw between bubbles and depression. ...
The larger point is that Turkey isn't really the problem; neither are South Africa, Russia, Hungary, India, and whoever else is getting hit right now. The real problem is that the world's wealthy economies — the United States, the euro area... — have failed to deal with their own underlying weaknesses. Most obviously, faced with a private sector that wants to save too much and invest too little, we have pursued austerity policies that deepen the forces of depression. Worse yet, all indications are that, by allowing unemployment to fester, we're depressing our long-run as well as short-run growth prospects, which will depress private investment even more. ...
So Turkey seems to be in serious trouble — and China, a vastly bigger player, is looking a bit shaky, too. But what makes these troubles scary is the underlying weakness of Western economies, a weakness made much worse by really, really bad policies.

Links for 01-31-2014

Posted: 31 Jan 2014 12:03 AM PST

Mobility and Inequality

Posted: 30 Jan 2014 11:00 AM PST

Dean Baker:

Mobility and Inequality: More on Non-New Findings: Robert Samuelson is happy to tell us that contrary to what he hoped some of us believed, there was not much change in mobility for children entering the labor force between the first President Bush and second President Bush's administrations. Samuelson misrepresents the study to imply that it finds that there has been no change in mobility over the post-war period. ...
Samuelson ... notes the study's finding that there has been little change in mobility for workers entering the labor market in 2007 compared to 1990. The study then refers to earlier work finding no change in mobility prior to 1990. This study did not itself examine the period prior to 1990.
This is important since that is the period in which we might have expected growing inequality to have a notable impact on mobility. There was some divergence between quintiles of income distribution in the 1980s. In the years since 1980, there has not been much divergence between the bottom half of the top quintile and the rest of the income distribution. Most of the inequality was associated with the pulling away of the one percent from everyone else. This study made no effort to examine mobility into the one percent.
As far as mobility in the years prior to the 1990, contrary to the claim of this study, the research is far from conclusive. For example, an assessment published by the Cleveland Fed concluded:
"After staying relatively stable for several decades, intergenerational mobility appears to have declined sharply at some point between 1980 and 1990, a period in which both income inequality and the economic returns to education rose sharply. This finding is also consistent with theoretical models of intergenerational mobility that emphasize the role of human capital formation. There is fairly consistent evidence that intergenerational mobility has stayed roughly constant since 1990 but remains below the rates of mobility experienced from 1950 to 1980."
While it would be wrong to take this statement as conclusive, it is also wrong to take the assessment of the study cited by Samuelson as conclusive and it is a gross misrepresentation to imply that this study examined patterns in mobility over the whole post-war period. It did not even try to examine changes in mobility over the 1980s, the period when patterns in inequality would have most likely led to a decline in mobility. 

The Q4 GDP Report

Posted: 30 Jan 2014 09:54 AM PST

Comments on today's GDP report for the 4th quarter of last year are generally upbeat:

Q4 GDP: Solid Report, Positives Looking Forward, by Bill McBride: The advance Q4 GDP report, with 3.2% annualized growth, was slightly above expectations. Personal consumption expenditures (PCE) increased at a 3.3% annualized rate - a solid pace. ...

Overall this was a solid report, and there are several positives going forward...

But:

...the Federal Government subtracted 0.98 percentage points from growth in Q4, and residential investment subtracted 0.32 percentage points. Imagine no Federal austerity - Q4 GDP would have been above 4%. Luckily it appears austerity at the Federal level will diminish in 2014, and of course I expect that residential investment will make a solid contribution this year. ...

The drag from state and local governments appears to have ended after an unprecedented period of state and local austerity (not seen since the Depression). State and local governments have added to GDP for three consecutive quarters now.

I expect state and local governments to continue to make small positive contributions to GDP going forward. ...

Josh Bivens at EPI says there are things in the report to be "glum about":

Scratching Just One Level Below Surface, Growth Numbers Look a lot Less Impressive: The last six months of 2013 saw the headline GDP growth rate reach 3.7 percent. That's a healthy number. Not gangbusters (we really have seen growth rates over 5 percent for a year or more in previous recoveries where there was slack in the economy comparable to what persists today), but undeniably healthy.
So what's to be glum about?
Strip out the contribution of inventory investments and exports, and add in (rather than subtract) the value of imports. This is a measure of real "final sales to domestic purchasers," or, what is sometimes called domestic demand. It's a measure of how much demand from households, businesses, and governments is growing—and since the economy's problem remains a huge shortfall of this demand relative to productive potential, it's a key barometer of health.
Domestic demand growth for the last six months of 2013 was only half as fast as headline GDP growth (1.8 percent). ...
Are there any reasons to be less glum about 2014? For sure.
The big one is that federal fiscal policy will no longer be actively throttling growth. It knocked nearly a full percentage point off the fourth quarter growth rate. To be clear, fiscal policy won't aid growth in 2014, instead it will provide a very slight drag rather than an anvil-heavy drag. This is what counts as progress in today's fiscal policymaking. But, we'll take what we can, I guess.

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