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January 16, 2015

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Paul Krugman: Francs, Fear and Folly

Posted: 16 Jan 2015 12:24 AM PST

 A lesson to be learned:

Francs, Fear and Folly, by Paul Krugman, Commentary, NY Times: ...On Thursday the Swiss National Bank, the equivalent of the Federal Reserve, shocked the financial world with a double whammy, simultaneously abandoning its policy of pegging the Swiss franc to the euro and cutting the interest rate it pays on bank reserves to minus, that's right, minus 0.75 percent. Market turmoil ensued.
And you should feel a shiver of fear, even if you don't have any direct financial stake in the value of the franc. For Switzerland's monetary travails illustrate in miniature just how hard it is to fight the deflationary vortex now dragging down much of the world economy. ...
If you ask me, the Swiss just made a big mistake. But frankly — francly? — the fate of Switzerland isn't the important issue. What's important, instead, is the demonstration of just how hard it is to fight the deflationary forces that are now afflicting much of the world — not just Europe and Japan, but quite possibly China too. And while America has had a pretty good run the past few quarters, it would be foolish to assume that we're immune.
What this says is that you really, really shouldn't let yourself get too close to deflation — you might fall in, and then it's extremely hard to get out. This is one reason that slashing government spending in a depressed economy is such a bad idea: It's not just the immediate cost in lost jobs, but the increased risk of getting caught in a deflationary trap.
It's also a reason to be very cautious about raising interest rates when you have low inflation, even if you don't think deflation is imminent. Right now serious people — the same serious people who decided, wrongly, that 2010 was the year we should pivot from jobs to deficits — seem to be arriving at a consensus that the Fed should start hiking very soon. But why? There's no sign of accelerating inflation in the actual data, and market indicators of expected inflation are plunging, suggesting that investors see deflationary risk even if the Fed doesn't.
And I share that market concern. If the U.S. recovery weakens, either through contagion from troubles abroad or because our own fundamentals aren't as strong as we think, tightening monetary policy could all too easily prove to be an act of utter folly.
So let's learn from the Swiss. They've been careful; they've maintained sound money for generations. And now they're paying the price.

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Posted: 16 Jan 2015 12:06 AM PST

 

 

'State and Local Tax Systems Hit Lower-Income Families the Hardest'

Posted: 15 Jan 2015 10:36 AM PST

Michael Leachman of the CBPP:

State and Local Tax Systems Hit Lower-Income Families the Hardest, CBPP: In nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families, a new report from the Institute on Taxation and Economic Policy (ITEP) finds. As the New York Times' Patricia Cohen wrote, "When it comes to the taxes closest to home, the less you earn, the harder you're hit."...
In the ten states with the most regressive tax systems, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy neighbors. ...
A number of states, including Kansas, North Carolina, and Ohio, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay. Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.

'Switzerland’s One-Day, 18 Percent Currency Rise'

Posted: 15 Jan 2015 10:17 AM PST

Neil Irwin:

Economic Lessons From Switzerland's One-Day, 18 Percent Currency Rise: ...It is not every day that the currency of an advanced, economically important country rises by double-digit percentages against the currencies of other such countries within mere hours. But that is what happened to the Swiss franc on Thursday. It is up 18 percent against the euro as of Thursday morning, and at one point was up 39 percent. Currency strategists were searching for any analogue in modern history for a similarly abrupt move in major Western currency and coming up empty.
The Swiss move offers interesting lessons about the oddly precarious state of the global economy, but first it's worth working through what exactly the Swiss National Bank has done. ...

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