Economist's View

Feldstein: The Dollar is the World's Primary "Investment Currency"

2010-01-10T13:43:00.001-08:00

Martin Feldstein says the role of the dollar in foreign exchange reserve balances has changed:

The dollar’s fall reflects a new role for reserves, by Martin Feldstein, Commentary, Financial Times: I am often asked whether the ongoing decline of the dollar implies that it can no longer serve as a reserve currency. My short answer is that most countries no longer hold dollars and other currencies as traditional reserves. The role of foreign exchange balances has changed from being short-term funds used to bridge export-import gaps to being long-term investment funds. In this new world, the dollar has shifted from being almost the sole “reserve currency” of many countries to being the primary “investment currency”, a role that it will continue to play far into the future.

A bit of history is helpful... In 1997 the Thai government tried to maintain the Thai bhat at an overvalued level. When it exhausted its reserves doing that, it was forced to devalue, generating substantial profits for those who had borrowed bhat and sold it for dollars.

Speculators then attacked other Asian currencies. Even a currency not fundamentally overvalued could be profitably attacked if speculative borrowing and short-selling could force the government to exhaust its reserves and have to devalue.

These experiences taught governments two lessons. First, it is dangerous to try to maintain an overvalued currency. Second, even if its exchange rate is not overvalued, a country could face a successful attack by forex speculators if it does not have a very large amount of foreign exchange.

Countries responded by deliberately keeping their currencies undervalued to run trade surpluses and using these surpluses to accumulate foreign exchange. We now see Korea with foreign exchange assets of $200bn (€136bn, £123bn), Taiwan $300bn, Thailand $100bn and China more than $2,000bn.

These funds are no longer held to manage temporary swings in imports and exports or investment flows. They are best seen as investment funds that also deter attacks by forex speculators. Similarly, the oil-producing countries ... recognize the investment nature of their foreign exchange accumulation. Instead of just holding these balances in short-term US Treasury bills, they have created sovereign wealth funds with sophisticated investment strategies.

It is prudent for any country with large foreign exchange balances to diversify those funds. ... That diversification cuts demand for the dollar, putting pressure on its value. ... But even as countries diversify away from exclusive reliance on dollars, the dollar will continue to be the main form of liquid investment for countries around the world.

As this portfolio rebalancing comes to an end, demand for dollars will stop falling ... What looks like a crisis of confidence in the dollar as a reserve currency is just part of the evolutionary process that will eventually halt the dollar’s decline.

Obama Says Banks Should Lend More

2010-01-10T13:36:00.001-08:00

Obama tells bankers they should lend more to small businesses and homeowners:

Obama Tells Bankers That Lending Can Spur Economy, by Helene Cooper and Javier Hernandez, NY Times: President Obama pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others.

Meeting with executives from 13 financial institutions, Mr. Obama sent a clear message that the industry had a responsibility to help nurse the economy back to health and do more to create jobs in return for the bailout last year that kept Wall Street and the banking system afloat.

But ... Mr. Obama also confronted the limits of his power to jawbone the industry. ... The heads of three of the biggest firms — Goldman Sachs, Morgan Stanley and Citigroup — did not even make it to the White House meeting in person, having waited until Monday morning to travel to Washington and then being held up by fog.

“America’s banks received extraordinary assistance from American taxpayers to rebuild their industry,” Mr. Obama said in remarks after a midday meeting with bankers at the White House. “Now that they’re back on their feet we expect an extraordinary commitment from them to help rebuild our economy.” ...

Bank of America said after the meeting that it would increase lending to small and mid-sized businesses by $5 billion next year over what it lent to them in 2009.

Speaking outside the White House, Richard K. Davis, the chief executive of U.S. Bancorp,... said financial institutions would re-examine small business loans that had been denied, but he cautioned that banks had a responsibility to carefully evaluate the qualifications of each client. “We simply want to assure that we make qualified loans,” he said. ...

The tone for the White House meeting with the bankers was set Sunday night when CBS’s “60 Minutes” broadcast an interview in which Mr. Obama said “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” ...

“We have to get them off the sidelines and get them to play a more active role in our economic recovery,” Rahm Emanuel, the White House chief of staff, said on Sunday. “They play an essential role in helping the economy grow.”

There are hurdles to get over on both the demand and supply side of the equation. Because of the recession, the demand for loans for new investment and for other purposes is down, but when firms do apply for credit, they are less likely to get it because banks assess credit worthiness partly based upon current economic conditions. The poor state of the economy has led them to conclude that many loans that might be made in better times are too risky to make right now

On the demand side, tax cuts and other incentives would help, but the supply of credit has to be addressed too. Yes, there's plenty of liquidity available, bank vaults are overrun with funds, but banks are reluctant to lend in this environment (particularly small and medium sized banks who face lots of uncertainty over their exposure to commercial real estate loans that may or may not be paid off). A solution to this is for the government to insure the loans in some way through tax write-offs, direct loss sharing, subsides, etc., there are lots of ways to do this, but it's hard to imagine anything like this happening in the present political environment, and the desirability of encouraging risky loans as a solution to our problems is questionable in any case (the money may be better spent on public projects with a high social return). However, if the government wants to encourage more lending in the private sector, something along these lines will need to be done. I don't see how speeches and meetings with bank executives asking them to lend more will do much to solve the problems, particularly the problems at smaller banks.

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2009-12-31T23:59:00.000-08:00

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links for 2009-12-14

2009-12-15T07:02:00.000-08:00

"Defining Success for Climate Negotiations in Copenhagen"

2009-12-10T23:33:00.000-08:00

Robert Stavins gives his assessment what will constitute "real progress" in the Copenhagen climate talks:

Defining Success for Climate Negotiations in Copenhagen, by Robert Stavins: ...[T]he fact that the White House has decided to send the President to Copenhagen for the final day, where he will assemble with some 90 other world leaders, and participate in closing statements (not to mention photo opportunities), indicates that the Administration is relatively confident that the talks will not collapse in a logjam of disagreement between the industrialized world and the developing countries, but rather that there will be a successful outcome.

The key outstanding question is whether the outcome will be one that provides a sound foundation for meaningful, long-term global action, not simply some notion of immediate, albeit highly visible triumph. ...

The gloom and doom predictions we’ve been hearing about the global climate negotiations taking place in Copenhagen this week and next are fundamentally misguided. The picture is much brighter than it might seem for ... coming up with a successor for the Kyoto Protocol, which essentially sunsets in 2012.

The best goal for the Copenhagen climate talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph. This is because of some basic scientific and economic realities.

First, the focus of scientists (and policy makers) is and should be on stabilizing concentrations at acceptable levels by 2050 and beyond, because it is the accumulated stock of greenhouse gas emissions — not the flow of emissions in any year — that are linked with climate consequences.

Second, the cost-effective path for stabilizing concentrations involves a gradual ramp-up in target severity, to avoid rendering large parts of the capital stock prematurely obsolete.

Third, long-term technological change is the key to the needed transition from reliance on carbon-intensive fossil fuels to more climate-friendly energy sources.

Fourth, the creation of long-lasting international institutions is central to addressing this global challenge.

Indeed, it would be easy, but unfortunate, for countries to achieve what some people wish to define as “success” in Copenhagen: a signed international agreement, glowing press releases, and related photo opportunities for national leaders. Such an agreement could only be the Kyoto Protocol on steroids: more stringent targets for the industrialized countries and no meaningful commitments by the key rapidly-growing emerging economies of China, India, Brazil, Korea, Mexico, and South Africa (let alone by the numerous developing countries of the world).

Such an agreement could — in principle — be signed, but it would not reduce global emissions and it would not be ratified by the U.S. Senate (just like Kyoto). Hence, there would be no real progress on climate change.

If it’s not reasonable to expect that a comprehensive post-Kyoto policy architecture will be identified in Copenhagen, what would constitute real progress? One important step forward would be a constructive joint-communiqué from major countries (just seventeen industrialized and emerging economies account for about 90% of annual emissions).

Such a joint-communiqué could lay out key progressive principles to underlie a future climate agreement, such as...: all countries recognize their historic emissions (read, the industrialized world); and all countries are responsible for their future emissions (think of those rapidly-growing emerging economies). ... Various policy architectures could subsequently build on these dual principles and make them operational, beginning to bridge the massive political divide which exists between the industrialized and the developing world.

In addition, a mid-term agreement could be reached on an approach involving an international portfolio of domestic commitments, whereby each nation would commit and register to abide by its domestic climate commitments, whether those are in the form of laws and regulations or multi-year development plans. Support for such an approach has been voiced by a remarkably diverse set of countries, including Australia, India, and the United States.

The key question is not what this approach would accomplish in the short-term, but whether it would put the world in a better position two, five, and ten years from now in regard to a long-term path of action.

Consistent with this portfolio approach, President Obama recently announced that the United States would put a target on the table in Copenhagen to reduce emissions 17 percent below 2005 levels by 2020 (in line with climate legislation in the U.S. Congress). In response, China announced that it would reduce its carbon intensity (emissions per unit of economic activity) 40 percent below 2005 levels over the same period of time. Subsequently, India announced similar targets. Given these countries rapid rates of economic growth, the announced targets won’t cut emissions in absolute terms, but they are promising starting points for negotiations.

So, despite the multitude of negative pronouncements about the slow pace of international climate negotiations, there are positive developments and promising paths forward. It is fortunate that a few key nations, including the United States, appear to be more interested in real progress than symbolic action.

Weekly Claims for Unemployment Insurance Increase Slightly

2009-12-10T19:49:00.000-08:00

From Calculated Risk:

The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 5, the advance figure for seasonally adjusted initial claims was 474,000, an increase of 17,000 from the previous week's unrevised figure of 457,000. The 4-week moving average was 473,750, a decrease of 7,750 from the previous week's revised average of 481,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 28 was 5,157,000, a decrease of 303,000 from the preceding week's revised level of 5,460,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 7,750 to 473,750. This is the lowest level since October 2008.

Although falling, the level of the 4 week average is still high, suggesting continuing job losses.

Is this a momentary pause in a slow recovery, noisy weekly data obscuring the trend, or a sign that we are beginning to move sideways? Even if we aren't moving sideways, we aren't doing enough to help labor markets recover, so if we are moving sideways - surely a possibility - the policies that are in place are inadequate. We need to do more.

"How Have Quantitative Financial Models Been Used and Misused?"

2009-12-10T17:45:00.000-08:00

A recent symposium on Financial models and financial innovation at Columbia University wonders "Why all the Fuss?":

Financial Models: Why All the Fuss?, by Catherine New: The research symposium “The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused” at Columbia Business School on December 4 explored the causes and effects of the proliferation of quantitative finance. Donald MacKenzie, a professor of sociology at the University of Edinburgh, gave the keynote speech (PDF).

Professor Bruce Kogut, in his opening remarks, acknowledged that financial engineering and innovation have received an onerous rap in the fallout from the financial crisis. However, he suggested that the field was ripe for public debate.

“It might be easy to leap to the conclusion that the subtext of today is that financial models created the crisis and hence innovation is bad. But such a deduction is in fact deeply complex and largely suspect,” he said. “Why is there such debate over financial innovations? After all, innovation is a driver of economic growth and wealth, so why all the fuss?” Kogut suggested three possibilities, including the disparity between private and social value, unanswered questions about systemic risk and the speed at which innovation takes place.

Professor Paul Glasserman pointed to popular media portrayals, like WIRED’s “Recipe for Disaster: The Formula That Killed Wall Street” (Feb. 2009), which excoriated the financial industry’s use of models, as perpetuating misunderstanding about the uses and capabilities of quantitative finance.

“The article sets the record for the most incorrect statements packed into a title,” Glasserman said. “In a very short time there has been a dramatic shift in perception of quantitative finance.”

Glasserman moderated the panel “Does the Practice of Quantitative Finance Need to Be Changed?”...

Much of the panel’s discussion focused on when models are useful — and not useful — in financial markets. Derman, author of My Life as a Quant, led the discussion and offered a discourse on what models are and how they can be applied (download presentation PDF). He cautioned that there is never a “right” model but rather ”somewhere north of common sense and south of hubris lies the appropriate use of models.”

Beunza, formerly a visiting professor at the Business School, cautioned that the use of models is a “doubled-edged sword”; his research shows that they lead both to increased arbritrage and better reflexiveness.

Goldman Sachs’ research director Kent Daniel argued that models benefit many fields, such as airline safety, and not only financial markets. However, he cautioned that exacting data was fundamental to the use of models. “A successful quant model has to be subjected to every kind of scrutiny you have,” he said. “If your organization doesn’t do that, you’ll have a failure.”

There are important uses for financial products, even complicated ones, so I don't want to impugn innovation generally, but I also don't want to adopt the position that it was all useful - it clearly wasn't and stronger regulatory oversight is needed. As for the defense of financial models and innovation described above, the statement that innovation generally is the source of economic growth, therefore financial innovation must also be good, isn't much help. Similarly, if saying "models benefit many fields, such as airline safety, and not only financial markets" is the best defense of risk models available, that's telling.

[For those of you tempted to cite or that already have cited Paul Volcker's recent statement that ATMs are the only useful thing to come out of the financial industry in recent decades, I'd be more comfortable with your citing him as an all-knowing authority if you also adopted his position against auditing the Fed, and his position that the Fed ought to be the primary systemic risk regulator. But rather than listening to Volcker and others you have found to be trustworthy and wise in the past, many of you seem to find the arguments of people like Ron Paul and Jim DeMint compelling, and you have thrown your support behind their positions (something you'd be unlikely to do in any other context -- that alone ought to cause you to rethink this -- whose interests do you think people like DeMint are promoting?). If you get your way and congress, and by extension the financial industry, begins to have a strong influence over both policy and regulation, I hope you get the results you were hoping for. But I don't think you will.]

links for 2009-12-09

2009-12-10T07:03:00.000-08:00

Krugman versus Bartlett on Job Creation

2009-12-10T00:50:00.000-08:00

[The discussion begins at the 2:30 mark on the video. Source and transcript.]

The main issues they debate are whether another stimulus package is needed at this point, and if so, whether money allocated to the TARP program should be redirected to job creation.

The Administration’s Job Creation Proposal is Inadequate

2009-12-09T11:53:00.001-08:00

At CBS MoneyWatch, a brief summary and evaluation of the president's job creation proposal:

The Administration’s Job Creation Proposal is Inadequate, by Mark Thoma: The president unveiled his job creation strategy yesterday, and it contains three main elements, tax incentives that encourage small businesses to hire more workers, more spending on infrastructure and other large projects, and rebates for consumers who invest in energy saving improvements for their homes (the so-called "cash for caulkers" program).

How will this program be financed? According to Robert Reich, the plan is to use $70 billion of the recent unexpected $200 billion in savings on the TARP program arising from new estimates of the program's cost.

This proposal is not very specific, and if it makes it through the legislative process it will likely change quite a bit. But as it stands there are three problems with it. First, it does not create jobs directly, all job creation occurs indirectly through incentives such as reduced capital gains taxes for small businesses, other measures that make investment cheaper, rebates for home weatherization, etc. The program relies upon people acting upon these incentives, which they may or may not do, and even if the incentives are acted upon job creation is likely to be slow due to its indirect nature. Second, the amount, $70 billion, is too small to make much of a difference given the size of the unemployment problem. Third, it's disappointing that one of the best job creation/preservation measures the administration could have proposed, more help for state and local governments battered by budget problems arising from the recession is not part of the proposal. [Summary of various types of job creation strategies]

We need more direct and more immediate job creation than this proposal puts forth, and we need a much larger job stimulus package to make a noticeable dent in the problem. The argument for the package as announced is that this is the most that the administration can possibly get, anything larger or involving direct hiring won't be politically feasible due to worries over the deficit and worries that direct hiring amounts to wasteful "make-work" (a view I disagree with).

Thus, given the meager size of the proposal and the manner in which it is structured, it seems that this is intended more for its political effects than for its economic effects. The attempt is to tell workers, small businesses, and others that the administration cares about them, it "feels their pain" to borrow a phrase from a previous administration.

But I think this strategy is a mistake both economically and politically. Economically, it leaves people unemployed who could be working and paying taxes, an unacceptable outcome given the struggles unemployed households face. Politically, if the administration and congress are going to do another stimulus package, it needs to be large enough to make a difference.

In the end -- which for a politician means the next election -- people won't care that Obama threw a speech and a few billion dollars their way, that he understood the difficulties they face. People want action, some demonstration that the administration understands the problem and has done what is needed to fix it, and measures intended purely for their political effect won't get us there. Perhaps the plan is to blame Republicans for preventing more aggressive programs if jobs are still a problem as the election approaches, but I don't think that will work, particularly since Democrats do not appear to be willing to fight tooth and nail for a larger package. If jobs are not forthcoming, it's the Democrats not the Republicans who will face the wrath of voters. [Permalink]

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"On the Consequences of Nominal Wage Flexibility"

2009-12-09T11:52:00.001-08:00

Gary Becker and others have called for a cut in the minimum wage as part of the solution to the unemployment problem. This group believes that if markets are free to adjust, then they will clear, so any problem with involuntary unemployment must be due to some impediment to full market adjustment. What is the impediment? Becker and others assert that an important cause of Keynesian type downward wage rigidity is the minimum wage. The failure of wages to fall sufficiently fast in recessions is due in part to the presence of the minimum wage, and the wage stickiness creates an excess supply of labor (and hence, unemployment). The recommendation to reduce downward rigidity by cutting the minimum wage follows from this reasoning.

Rajiv Sethi explains why a fall in wages may make things worse rather than better:

On the Consequences of Nominal Wage Flexibility, by Rajiv Sethi: With the unemployment rate hovering above 10% and likely to stay in this range for some time, there has been a lot of discussion about what (if anything) the government should do to stimulate job creation. Following a link on Greg Mankiw's blog, I came across Gary Becker's view of the matter:

Keynes and many earlier economists emphasized that unemployment rises during recessions because nominal wage rates tend to be inflexible in the downward direction. The natural way that markets usually eliminate insufficient demand for a good or service, such as labor, is for the price of this good or service to fall. A fall in price stimulates demand and reduces supply until they are brought back to rough equality. Downward inflexible wages prevents that from happening quickly when there is insufficient demand for workers.

As one might expect given his diagnosis of the problem, Becker goes on to "fully endorse" a cut in the minimum wage, but does not see this as being politically feasible at present.

I found this post striking for three reasons. First, it expresses a view that is actually quite widely held among economists today, namely that if nominal wages were flexible in the downward direction, involuntary unemployment could not persist for very long. This view is held even by many who would strenuously object on fairness grounds to a cut in the minimum wage. Second, Becker attributes to Keynes an opinion that is precisely the opposite of that expressed in the General Theory. And third, there has been very little serious analysis of the consequences of nominal wage flexibility in an economy with involuntary unemployment. A notable exception is a 1975 paper by James Tobin that has been largely (and unjustly) forgotten. For reasons discussed below, Tobin's analysis does not support Becker's position.

Keynes did indeed assume for the most part that nominal wages were inflexible, but also maintained that wage flexibility would make matters worse rather than better: "it would be much better that wages should be rigidly fixed and deemed incapable of of material changes, than that depressions should be accompanied by a gradual downward tendency of money wages" (p. 265). This is the starting point for Tobin's analysis:

Keynes tried to make a double argument about wage reduction and employment. One was that wage rates were very slow to decline in the face of excess supply. The other was that, even if they declined faster, employment would not - in depression circumstances - increase. As to the second point, he was well aware of the dynamic argument that declining money wage rates are unfavorable to aggregate demand. But perhaps he did not insist upon it strongly enough, for the subsequent theoretical argument focused on the statics of alternative stable wage levels.

To drive this point home, Tobin builds a simple model with three dynamic equations: output adjusts in response to excess demand in the goods market, inflation (relative to expectations) adjusts in response to deviations of output from its full employment level, and expectations of inflation adjust adaptively in response to the difference between actual and expected inflation. So prices (and nominal wages) are fully flexible and there is no limit to how low these can fall if output remains persistently below its full employment level.

An equilibrium of this model is characterized by full employment, steady inflation, and correct expectations. But Tobin is less interested in the equilibrium behavior of the economy than in the dynamic adjustment process from an initial state of disequilibrium. He establishes that even if the equilibrium is locally stable, it need not be globally stable: if, for whatever reason, output drops far enough below its full employment level, then (as in Axel Leijonhufvud's corridor hypothesis) cumulative declines in employment and prices can result. Instead of improving matters, the downward flexibility of money wages can prolong and deepen an economic contraction.

Tobin's analysis here is methodologically old-fashioned in the sense that no attempt is made to provide microfoundations for the postulated adjustment processes. But the logic is compelling, and I am certain that with sufficient ingenuity, the argument could be expressed in more modern terms. In any case, it is no less convincing than the partial equilibrium Walrasian analysis of the labor market that has led some to prescribe lower nominal wages as a solution to our current woes.

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links for 2009-12-08

2009-12-09T11:51:00.001-08:00

"The President's Job's Initiative Doesn't Measure Up"

2009-12-08T15:31:00.001-08:00

Robert Reich:

The President's Job's Initiative Doesn't Measure Up, by Robert Reich: Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn't want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn't look like more stimulus because it's not really adding to the deficit. It's coming out of savings from money already authorized to be spent on the bank bailout. Hmmm?

No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now -- an economy fundamentally out of balance -- we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

States and cities, for example, are estimated to be $350 billion hole this year and next. They can't run deficits so they're wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That's a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama's "new" stimulus, announced today, is about all we have, and it's not nearly enough.

The word in Washington is we're out of the woods. The rate of unemployment dipped from 10.2 percent in September to 10 percent in October. In our nation's capital, a one-month trend marks a turnaround. Don't believe it for a moment. The real story of October was the increasing number of Americans who dropped out of the labor force, too discouraged even to look for work.

Main Street is hurting worse than ever. Ten percent unemployment translates into roughly 18 percent of our workforce unemployed or underemployed. Housing markets are in terrible shape... A quarter of all American children are now dependent on food stamps.

There is no reason to tolerate this degree of misery. We know exactly what to do. The government has the fiscal tools to do it. Start by bailing out state and local governments... Renew unemployment and COBRA benefits. Increase federal spending on infrastructure. If we have to, hire people directly. The package should be $400 billion over two years.

We don't know exactly how much the President is proposing to spend, but sources tell me it's in the range of $70 billion, redirected from the $200 billion in TARP savings. ... This isn't really balance at all. It prolongs the economic imbalance.

A jobs program that is too small is politically dangerous. If unemployment is still a big problem even after this program is in place, it will look like two separate programs -- which in their totality are not large enough to get the job done -- have failed to generate new jobs. That's not only costly in this recession -- people who could be employed won't be -- but it will also undermine the case for similar programs in the future. This removes an important policy tool from the government's arsenal, even though a jobs/stimulus program large enough to make a dent in the problem would likely work.

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The Relationship Between Budget Deficits, Fed Independence, and Inflation

2009-12-08T15:30:00.003-08:00

At MoneyWatch, some of the pressures the Fed might come under in the future if the government debt continues to rise, and the important role that Fed independence plays in making sure that the debt is not inflated away:

Budget Deficits, Fed Independence, and Inflation, by Mark Thoma: I have been critical of both Alan Greenspan and Ben Bernanke for giving recommendations concerning fiscal policy during their testimony before congress. In Greenspan's case, it was his comments about tax cuts that I found problematic, while for Bernanke it was his comments on entitlements.

But monetary and fiscal policy are connected, and the Fed chair should talk about the impact that a growing debt level might have monetary policy. That is, while I don't think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. ...[...continue...]...

links for 2009-12-07

2009-12-08T15:30:00.001-08:00

Stiglitz: Too Big to Live

2009-12-08T15:28:00.001-08:00

When Ben Bernanke was asked about the "too big to fail" problem not too long ago, the WSJ Economics blog reports:

Federal Reserve Chairman Ben Bernanke voiced skepticism that breaking-up big banks is the way to solve the so-called too big to fail problem...

Asked for his thoughts on Bank of England Gov. Mervyn King’s recent speech that advocated breaking up banks that were so large that their failure would represent a risk to the broader financial system, Bernanke said that making banks smaller would not necessarily be the solution to the problem. Smaller banks can also play important roles in financial systems, he said. He noted that during the 1930s, the U.S. didn’t have too many large bank failures, but the country suffered thousands of failures of smaller banks that added to the woes of the Great Depression. “I don’t think simply making banks smaller is the way to do it,” he said.

Still, more than once during his comments to the Economic Club of New York, Bernanke emphasized that it is crucial that large financial firms be allowed to fail in order to return market discipline to the financial system.

It is not at all clear to me that breaking large banks into smaller pieces addresses the connectedness issue. Smaller banks can be just as interconnected as larger banks, and hence simply breaking banks up without examining the effect it has on the underlying financial network connections may not reduce systemic risk.

Joseph Stiglitz says break them up whenever possible, regulate them heavily when it's not possible:

Too Big to Live, by Joseph E. Stiglitz, Commentary, Project Syndicate: A global controversy is raging... Mervyn King, the governor of the Bank of England, has called for restrictions on the kinds of activities in which mega-banks can engage. ... King is right to demand that banks that are too big to fail be reined in. In the United States, the United Kingdom, and elsewhere, large banks have been responsible for the bulk of the cost to taxpayers. ...

The crisis is a result of at least eight distinct but related failures:

Too-big-to-fail banks have perverse incentives; if they gamble and win, they walk off with the proceeds; if they fail, taxpayers pick up the tab.

Financial institutions are too intertwined to fail...

Even if individual banks are small, if they engage in correlated behavior – using the same models – their behavior can fuel systemic risk;

Incentive structures within banks are designed to encourage short-sighted behavior and excessive risk taking.

In assessing their own risk, banks do not look at the externalities that they (or their failure) would impose on others, which is one reason why we need regulation in the first place.

· Banks have done a bad job in risk assessment – the models they were using were deeply flawed.

· Investors, seemingly even less informed about the risk of excessive leverage than banks, put enormous pressure on banks to undertake excessive risk.

· Regulators, who are supposed to understand all of this and prevent actions that spur systemic risk, failed. They, too, used flawed models and had flawed incentives; too many didn’t understand the role of regulation; and too many became “captured” by those they were supposed to be regulating.
... There are, of course, costs to regulations, but the costs of having an inadequate regulatory structure are enormous. We have not done nearly enough to prevent another crisis... King is right: banks that are too big to fail are too big to exist. If they continue to exist, they must exist in what is sometimes called a “utility” model, meaning that they are heavily regulated.

In particular, allowing such banks to continue engaging in proprietary trading distorts financial markets. Why should they be allowed to gamble, with taxpayers underwriting their losses? What are the “synergies”? Can they possibly outweigh the costs? Some large banks are now involved in a sufficiently large share of trading ... that they have, in effect, gained the same unfair advantage that any inside trader has.

This may generate higher profits for them, but at the expense of others. It is a skewed playing field – and one increasingly skewed against smaller players. Who wouldn’t prefer a credit default swap underwritten by the US or UK government; no wonder that too-big-to-fail institutions dominate this market.

The one thing nowadays that economists agree upon is that incentives matter. ... Given the lack of understanding of risk by investors, and deficiencies in corporate governance, bankers had an incentive not to design good incentive structures. It is vital to correct such flaws – at the level of the organization and of the individual manager.

That means breaking up too-important-to fail (or too-complex-to-fix) institutions. Where this is not possible, it means stringently restricting what they can do and imposing higher taxes and capital-adequacy requirements, thereby helping level the playing field. ...

Even if we fix bank incentive structures perfectly ... the banks will still represent a big risk. The bigger the bank, and the more risk-taking in which big banks are allowed to engage, the greater the threat to our economies and our societies. ... What is required is a multi-prong approach, including special taxes, increased capital requirements, tighter supervision, and limits on size and risk-taking activities.
Such an approach won’t prevent another crisis, but it would make one less likely – and less costly if it did occur.

I think limiting connectedness and limiting leverage ratios are both essential elements of reform. There will always be vulnerabilities, even in a system that has only small financial institutions, and we may not be able to identify the vulnerabilities in time. Shocks are going to happen. Limiting connectedness and leverage ratios for both big and small firms (along with regulation on what types of activities they can engage in, which addresses an aspect of connectedness) will reduce the magnitude of the damage to the financial system and the broader economy that those inevitable shocks are able to bring about.

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Paul Krugman: An Affordable Truth

2009-12-08T15:27:00.001-08:00

Will the meeting in Copenhagen produce a meaningful agreement on greenhouse gas emissions?:

An Affordable Truth, by Paul Krugman, Commentary, NY Times: Maybe I’m naïve, but I’m feeling optimistic about the climate talks starting in Copenhagen on Monday. President Obama now plans to address the conference on its last day, which suggests that the White House expects real progress. It’s also encouraging to see developing countries — including China, the world’s largest emitter of carbon dioxide — agreeing, at least in principle, that they need to be part of the solution.

Of course, if things go well in Copenhagen, the usual suspects will go wild. We’ll hear cries that the whole notion of global warming is a hoax perpetrated by a vast scientific conspiracy... We’ll also, however, hear cries that climate-change policies will destroy jobs and growth.

The truth, however, is that cutting greenhouse gas emissions is affordable as well as essential. Serious studies say that we can achieve sharp reductions in emissions with only a small impact on the economy’s growth. And the depressed economy is no reason to wait — on the contrary, an agreement in Copenhagen would probably help the economy recover.

Why should you believe that cutting emissions is affordable? First, because financial incentives work.

Action on climate, if it happens, will take the form of “cap and trade”: businesses ... will ... be able to increase their profits if they can burn less carbon — and there’s every reason to believe that they’ll be clever and creative about finding ways to do just that. ...

The truth is that conservatives who predict economic doom if we try to fight climate change are betraying their own principles. They claim to believe that capitalism is infinitely adaptable, that the magic of the marketplace can deal with any problem. But for some reason they insist that cap and trade — a system specifically designed to bring the power of market incentives to bear on environmental problems — can’t work.

Well, they’re wrong — again. For we’ve been here before.

The acid rain controversy of the 1980s was in many respects a dress rehearsal for today’s fight over climate change. Then as now, right-wing ideologues denied the science. Then as now, industry groups claimed that any attempt to limit emissions would inflict grievous economic harm.

But in 1990 the United States went ahead anyway with a cap-and-trade system for sulfur dioxide. And guess what. It worked, delivering a sharp reduction in pollution at lower-than-predicted cost.

Curbing greenhouse gases will be a much bigger and more complex task — but we’re likely to be surprised at how easy it is once we get started. ...

Still, should we be starting a project like this when the economy is depressed? Yes... — in fact, this is an especially good time to act, because the prospect of climate-change legislation could spur more investment spending.

Consider, for example, the case of investment in office buildings. Right now, with vacancy rates soaring and rents plunging, there’s not much reason to start new buildings. But suppose that a corporation that already owns buildings learns that over the next few years there will be growing incentives to make those buildings more energy-efficient. Then it might well decide to start the retrofitting now, when construction workers are easy to find and material prices are low.

The same logic would apply to many parts of the economy, so that climate change legislation would probably mean more investment over all. And more investment spending is exactly what the economy needs.

So let’s hope my optimism about Copenhagen is justified. A deal there would save the planet at a price we can easily afford — and it would actually help us in our current economic predicament.

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Fed Watch: Structural and Cyclical

2009-12-08T02:00:00.001-08:00

Tim Duy:

Structural and Cyclical, by Tim Duy: For several months, I have been telling stories that decompose US economic activity into what I think of as cyclical and structural dynamics. I believe the distinction is very important to firms, markets, and policymakers who need to be aware when one dynamic is clouding their view of the other.

The cyclical dynamics, in my opinion, are the most spectacular, the most visible. The real cyclical fireworks began in the second half of 2009, as the energy price shock decimated household budgets, quickly followed by a financial shock that triggered an additional pullback in demand. Firms unexpectedly found they had far too much excess capacity in this environment, and began the process of "rightsizing." Lob losses mounted even as falling energy costs and lower interest rates for those not credit constrained began to put a floor under spending.

Eventually, firms would realign capacity with the new level of demand, and job losses would taper off. That would mark the early stages of the cyclical bottom, the point at which growths returns. The initial growth spurt could be very rapid, as firms restock inventory and pent-up demand comes into play. The additional of government stimulus will add additional fuel to the fire.

Once the early stages of recovery are complete, the story shifts from cyclical to structural. The boost from inventory correction, pent-up demand, and government stimulus fade, and the underlying growth rate, the fundamental rates of activity, becomes evident. Now your expectations about the nation's economic direction depend on the weight you place on the structural factors. If you place nearly zero weight on those factors, then growth remains fairly high as the economy rapidly returns to potential. In effect, cyclical dynamics dominate your story; the Fed is simply flipping a switch that shifts the economy from high to low states and back again, a traditional post-WWII business cycle. If you place heavy weight on structural stories, you talk about the inability to revert to past patterns of consumer spending growth due to excessive household debt, a reversion to global imbalances that supports outsized import growth, lack of an asset bubble to compensate for these structural problems, etc. With these stories in your toolkit, you expect a low underlying growth rate - barely at potential growth - in which case the gap between actual and potential output remains distressingly high for possibly years to come.

I tend to view incoming data through both cyclical and structural lenses. The employment report is a prime example. Clearly, the steady improvement in the rate of deterioration of nonfarm payrolls since the spring follows the cyclical pattern as firms stop chasing demand down and thus stabilize their workforces. Moreover, recent increases in temporary help hiring also points to firming labor demand in the months ahead. It would seem that stronger growth does in fact have the desired impact on labor markets, and that fiscal stimulus helped accelerate recovery in the labor markets.

At the same time, though, one has to wonder what happens as the stimulus begins to fade? Will there be sufficient demand from other sectors to compensate for fiscal and monetary withdrawal? It is worth recalling the patterns of labor market dynamics as we exited from the 2001:

After the post-recession boost - inventory correction, pent-up demand, etc. - labor markets quickly returned to a period of stagnation that lasted until the housing bubble began to take hold. What in the next two years can we expect to take the place of that bubble? Furthermore, if you are worried about a relapse in the pace of growth, the ISM reports last week were not exactly comforting. Both revealed an overall slowing of activity, and employment signals were not exactly consistent with a strong rebound in hiring anytime soon. For that matter, the ADP report, while not one of my favorites to begin with, came in far below the actual NFP numbers, suggesting that maybe this employment report was a little stronger than the underlying trend.

Also worth noting is the dismal reports on retail sales that appear to have largely slipped below the radar last week. From the Wall Street Journal:

Many retailers are likely to start offering broader discounts and promotions before the end of the holiday shopping season in response to generally lackluster sales the stores reported for November, retailing experts said Thursday.

Overall, sales at stores open at least a year edged up less than 1% last month compared with a year earlier, according to data collected by Retail Metrics Inc., which catalogs sales at 30 retail chains. Wall Street analysts had been expecting a 2.2% increase.

Consumers did lay siege on retailers during the post-Thanksgiving shopping weekend, but kept to strict budgets, seeking out deals but shying away from anything not marked down. Households in general appear to be adopting my wife's mantra: "Fifty percent off just isn't good enough anymore." Now retailers are faced with the prospect they thought leaner inventories could help them avoid, ongoing markdowns throughout the holiday seasons, albeit not as bad as last year.

The bottom line is that what you need to take away from the current economic environment varies widely. Business in general should anticipate growth - growth that may be lackluster, vulnerable to policy withdrawal, and less dependent on consumer spending, but growth nonetheless. And any growth will force firms to reevaluate their hiring, sales expectations, supplier efficiency, etc. Don't be surprised if anecdotal stories of firms unable to find qualified workers start to emerge. The skills of those who lost jobs may simply be inconsistent with the needs of employers. In short, be prepared for scenarios that don't result in the end of the world as we know it, but still a different world with different patterns of activity.

This message to firms, however, is not nearly the whole story as far as policy is concerned. Policymakers need to be much more focused on the gap in current activity relative to potential than the rate of activity itself. Indeed, for all the excitement over the end of the recession, the 2.8% growth rate of 3Q09 is in the range of potential growth. It won't close the output gap, and it won't generate enough job growth to do much more than keep unemployment from rising further. Can the 2.8% number be maintain as fiscal stimulus fades and consumer spending ekes out historically meager gains? That should be question number one for policymakers. Number two should be: What more can we do to ensure that we push well ahead of 2.8%?

And question number two should be this: Why did the US economy yield such horrible employment performance this decade? The fact that we have just experienced a lost decade for jobs should be on policymaker's tongue. But it is not, I suspect because in many ways the lost decade was hidden by the spectacular rise and fall of housing, leaving few to reflect on the meaning of an economy which would have been in a decade-long jobless recovery without an asset bubble in the middle.

Moreover, policymakers have been lulled into a certain complacency on the job picture because on the exodus from the labor markets, with civilian labor force participation peaking ahead of the last recession, thus keeping a "lid" on unemployment rates:

And a longer view:

The beginning of this decade marked the end of a 35 year trend of increasing labor force participation. Is is a coincidence that this trend ended as the lost decade for US jobs began? Are these trends reinforcing each other? How so, and what does it imply about the prospects for jobs for the next decade?

But these, like the problematic imbalance between China and the US (if the imbalance re-exerts itself in the months ahead, how many of the recently lost US manufacturing jobs are likely to be recovered?), are very big questions. Questions policymakers are not likely to have much time for as they are lulled into a false sense of security by positive growth and improving nonfarm payrolls numbers - especially if unemployment stops rising.

The Administration has already made clear its concerns about the deficit. On the monetary front, those who worry about the yawning gap in potential output believe that more easing is desperately needed. The employment report, however, will tend to push policymakers in the other direction, a greater willingness to let the Fed's balance sheet contract, perhaps even deliberately rather than via the natural expiration of now unneeded financial market supports. To be sure, a push to raise the Fed Funds rate is premature; I believe the Fed intends to keep rates at rock bottom levels in the face of high unemployment. But this is not the relevant policy issue. The relevant issue is whether or not Fed policymakers are prepared to do more to close the output gap. Already, only St. Louis Federal Reserve President James Bullard looked open to such policy. But I suspect his position will only get more lonely as job growth, even lackluster job growth, builds. Indeed, the policy risk is a more rapid reversal of the Fed's balance sheet expansion as hawks like Richmond Federal Reserve President Jeffery Lacker - already concerned that the Fed need to prove its independence - increasing argue with a more rapid exit from the emergency expansion even as while the main policy rate holds at zero.

Bottom Line: Cyclical and structural forces are at play. But be wary about confusing the two; I fear this to be a particular problem for policymakers. Economic growth is likely to lead to complacency, but such complacency would be ill-advised when the decade's record on nonfarm payrolls leaves the job-generating capacity of the US economy in doubt.

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links for 2009-12-06

2009-12-08T01:59:00.001-08:00

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Did Bank Executives Lose Enough to Learn their Lesson?

2009-12-06T18:47:00.003-08:00

Will the losses that financial executives suffered as a result of the crisis provide the discipline necessary to prevent excessive risk taking in the future? Not according to this analysis:

Bankers had cashed in before the music stopped, by Lucian Bebchuk, Alma Cohen, and Holger Spamann, Commentary, Financial Times: According to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives. Many – in the media, academia and the financial sector – have used this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. That standard narrative, however, turns out to be incorrect.

It is true that the top executives at both banks suffered significant losses on shares they held when their companies collapsed. But our analysis ... shows the banks’ top five executives had cashed out such large amounts since the beginning of this decade that, even after the losses, their net pay-offs during this period were substantially positive. ...

Our analysis undermines the claims that executives’ losses on shares during the collapses establish that they did not have incentives to take excessive risks. ...[R]epeatedly cashing in large amounts of performance-based compensation based on short-term results did provide perverse incentives – incentives to improve short-term results even at the cost of an excessive rise in the risk of large losses at some (uncertain) point in the future.

To be sure, executives’ risk-taking might have been driven by a failure to recognise risks or by excessive optimism, and thus would have taken place even in the absence of these incentives. But given the structure of executive pay, the possibility that risk-taking was influenced by these incentives should be taken seriously.

The need to reform pay structures is not, as many have claimed, simply a politically convenient sideshow. ... To understand what has happened, and what lessons should be drawn, it is important to get the facts right. In contrast to what has been thus far largely assumed, the executives were richly rewarded for, not financially devastated by, their leadership of their banks during this decade.

It doesn't really matter whether executive compensation structures caused or contributed to the crisis or not. If the manner in which executives are paid creates perverse incentives and distorts decisions away from the best interests of shareholders, as it appears to do, then both the level and structure of the compensation should be fixed.

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Deposits in Failed Banks as a Percent of GDP

2009-12-06T18:47:00.001-08:00

Rolfe Winkler says suggestions that the current financial crisis was not as bad as the Great Depression are wrong and he offers this chart as evidence:

He adds:

If you add JP Morgan and Wells Fargo to the chart, it looks much worse. Goldman and Morgan Stanley don’t have deposits, but did have $2 trillion in liabilities between them as of August 31, ‘08

The Fed deserves more credit than it is getting for avoiding a much, much worse outcome for the economy. Yes, the Fed made mistakes, but are you really convinced that if Bernanke had been replaced by Larry Summers - and that was the likely outcome if he had been removed no matter how much you might wish it to be otherwise - things would have been better rather than worse? I'm not.

But I do want to add a few words about Bernanke's recent testimony before congress. I criticized Greenspan for taking a stand on fiscal policy in his testimony before congress, and I am not pleased that Bernanke waded into these waters. I think it's fine for the Fed chair to explain how budget deficits interact with monetary policy, how budget deficits affect the Fed's policy choices, what the Fed is likely to do if deficits persist (e.g., when markets return to normal, if deficits begin pressuring interest rates upward, will the Fed let interest rates rise or not?), matters that affect monetary policy in a fairly direct fashion. But to take stands on particular programs (e.g. Social Security and Medicare), to give advice on fiscal policy beyond its implications for monetary policy, to comment on matters outside of its purview unnecessarily politicizes the Fed. I have supported Bernanke's reappointment (if for no other reason than it's hard to imagine a viable candidate who would do better - be careful what you wish for), but this was disappointing.

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Will Deficits Bankrupt Our Grandchildren?

2009-12-06T01:04:00.003-08:00

Robert Frank says complaints that running deficits to offset downturns will bankrupt our grandchildren are "absurd":

How to Run Up a Deficit, Without Fear, by Robert H. Frank, Commentary, NY Times: Few subjects rival the federal budget deficit in its power to provoke muddled thinking.

It’s a pity, because there are really only three basic truths that policy makers need to know about deficits: First, it’s actually good to run them during deep economic downturns. Second, whether deficits are bad in the long run depends on how borrowed money is spent. And third, eliminating deficits entirely would not require any painful sacrifices. ...

The first proposition comes from ... Keynes, who argued that when total spending falls well below the level required for full employment, the economy won’t recover quickly on its own. Consumers won’t lead the way... And most businesses won’t invest... Only government ... has both the motive and opportunity to increase spending significantly during deep downturns.

Of course, if the government borrows to do so, the debt must eventually be repaid (or the interest on it must be paid forever). That fact has provoked strident protests about government “bankrupting our grandchildren.”

It’s an absurd complaint. Failure to stimulate the economy would mean a longer downturn. That ... would mean ... reduced tax receipts, increased unemployment insurance payouts, and depressed private investment. The net result? Higher total public borrowing and a permanent decline in productivity...

Once the economy is back on its feet, deficit logic changes. At full employment, extra borrowing often compromises future prosperity, just as critics say. ...

But the reverse would be true if government borrowing were used for productive investments. After decades of neglect of the nation’s infrastructure, attractive public investment opportunities abound. ... When government undertakes such investments, our grandchildren become richer, not poorer. ...

To eliminate deficits, we need additional revenue. The encouraging news is that we could raise more than enough to balance government budgets by ... tax[ing] activities that cause harm to others. Called Pigovian taxes ... such levies create a burden that is more than offset by the reductions they cause in costly side effects of everyday activities. ...
When producers emit sulfur dioxide into the atmosphere,... the resulting acid rain harms others. As the ... Clean Air Act demonstrated, the most efficient ... remedy was to tax sulfur dioxide emissions. ... Similarly, when motorists enter congested roadways, they impose additional delays on others. Here, too, taxation is the best remedy...

When the transactions of financial speculators fuel asset bubbles, they increase the risk of financial meltdowns. A small tax on those transactions would reduce this risk. ... Carbon dioxide emissions contribute to global warming. Here as well, taxation offers the most efficient and least intrusive remedy.

Anti-tax zealots denounce all taxation as ... depriving citizens of their right to spend their hard-earned incomes as they see fit. Yet nowhere does the Constitution ... does it grant us the right to harm others with impunity. No one is permitted to steal our cars or vandalize our homes. Why should opponents of taxation be allowed to harm us in less direct ways?

Taxes on harmful activities would be justified quite apart from any need to balance government budgets. But such taxes would also generate ample revenue for the public services we demand, quieting the ill-considered commentary about deficits. ...

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links for 2009-12-05

2009-12-06T01:04:00.001-08:00

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"Why Welfare Reform Fails its Recession Test"

2009-12-05T13:17:00.001-08:00

Was welfare reform enacted during the Clinton administration a mistake?:

Why welfare reform fails its recession test, by Peter Edelman and Barbara Ehrenreich, Commentary, Washington Post: We all like to imagine that there'll be something to stop our fall if we hit hard times. ... "There's always welfare, isn't there?"

Actually, no. When President Bill Clinton signed welfare reform into law, he didn't just end welfare as we knew it. For all practical purposes,... he brought an end to cash help of any kind for families with children in much of the country. While welfare reform was long ago declared a success in some quarters, it was deeply flawed from the beginning. The recession has shown how seriously unprepared it left us for hard times. ...

Clinton ended the legal right to cash assistance and imposed a five-year limit on federally financed help to any given family. Welfare reform also provided the states with nearly complete discretion over how to administer benefits. Most states responded with gusto, reducing welfare rolls nationally by two-thirds in just a few years.

So when the Great Recession came along, the government safety net for families with children was in tatters. The United States was no more prepared for massive unemployment than New Orleans had been prepared for its levees to fail. Some important government programs, including unemployment insurance and food stamps, have started to rise to the challenge...

By contrast, the caseload for TANF (Temporary Assistance for Needy Families, the name we now give welfare) is ... still just a little over a third of what it was 15 years ago, before welfare reform. ... And so welfare, generally speaking, has not cushioned the impact of the recession.

We can see the results: According to the National Law Center on Homelessness & Poverty, the number of homeless ... is up by 61 percent since the recession began... That figure will only continue to rise. The number of people living in poverty increased by 2.5 million during the first year of the recession, and it has surely risen further in 2009. The government reported recently that nearly 50 million Americans are experiencing what it delicately calls "food insecurity."

We are among the co-authors of a forthcoming report ... which documents the government's inadequate response to the human suffering caused by the recession and describes the excruciating choices people now face between feeding their families and paying the rent.

Both of us were critical of the new approach to welfare when it was enacted in 1996. ... But some advocates of welfare reform seemed to consider poverty a voluntary condition, one curable with a quick kick in the pants and the opportunity to work for minimum wage. There were not enough jobs even then, but, blinded by the economic boom of the 1990s, the authors of TANF seemed to think that the business cycle had been abolished and that prosperity would take us only onward and upward.

In the rapidly expanding service economy of the 1990s, many former welfare recipients did find jobs, but most did not escape poverty, and a significant number were pushed off the rolls without finding work. Research showed that one in five former recipients ultimately became disconnected from any means of support: They no longer had welfare, but they didn't have jobs. They hadn't married or moved in with a partner or family, and they weren't getting disability benefits. And so, after a decline in the late 1990s, the number of people living in extreme poverty ... shot up by more than a third... Nationally, the fraction of poor children getting help plummeted from almost two-thirds to less than a third. A number of states reduced their welfare rolls by 90 percent.

Perversely, many observers welcomed these huge declines as proof that welfare reform was working. They didn't bother to follow these families as they moved into ever more crowded living situations, pieced together patchworks of part-time jobs or left their children alone while they went to work. ...

Nationwide, there has been no increase in federal welfare funding since the 1996 law was enacted, so thanks to inflation, the value of that funding has eroded by about a third. There is an emergency fund for TANF in the stimulus package Congress passed in February, but little of it has been spent, primarily because it requires a match that fiscally strapped states are unable to put on the table. Most states in effect adopted a welfare policy of ignoring the recession. ...

It's time to acknowledge that America's 1996 experiment with welfare reform was based on reckless assumptions about the economy, as well as a callous disregard for the realities of sustaining a family. We need a massive emergency relief package not only to fund new jobs but to repair the grievous holes in our national safety net. Fifty million people need help now -- not in three months or six months, but today. [The full article is quite a bit longer.]

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"Can Science Fight Media Disinformation?"

2009-12-05T13:05:00.001-08:00

Is better science education the answer to our "media disinformation" problem?:

War Is Peace: Can Science Fight Media Disinformation?, by Lawrence M. Krauss, Commentary, Scientific American: ...The rise of a ubiquitous Internet, along with 24-hour news channels has, in some sense, had the opposite effect from what many might have hoped such free and open access to information would have had. It has instead provided free and open access, without the traditional media filters, to a barrage of disinformation. Nonsense claims had more difficulty gaining traction in the days when print journalism held sway and newspaper editors had the final word on what made its way into homes and when television news consisted of a half-hour summary of what a trained producer thought were the most essential stories of the day.

Now fabrications about “death panels” and oxymoronic claims that ”government needs to keep its hands off of Medicare” flow freely on the Internet, driving thousands of zombielike protesters to Washington to argue that access to health care will undermine their fundamental freedom to have their insurance canceled if they get sick. And 24-hour news channels, desperate to provide ”breaking” coverage at all hours, end up serving as public relations vehicles for any celebrity who happens to make an outrageous claim or, worse, decide that the competition for ratings requires them to be anything but ”fair and balanced” in their reporting.

“Fair and balanced,” however, doesn’t mean putting all viewpoints, regardless of their underlying logic or validity, on an equal footing. Discerning the merits of competing claims is where the empirical basis of science should play a role. I cannot stress often enough that what science is all about is not proving things to be true but proving them to be false. What fails the test of empirical reality, as determined by observation and experiment, gets thrown out like yesterday’s newspaper. One doesn’t need to debate about whether the earth is flat or 6,000 years old. These claims can safely be discarded, and have been, by the scientific method.

What makes people so susceptible to nonsense in public discourse? Is it because we do such a miserable job in schools teaching what science is all about—that it is not a collection of facts or stories but a process for weeding out nonsense to get closer to the underlying beautiful reality of nature? Perhaps not. But I worry for the future of our democracy if a combination of a free press and democratically elected leaders cannot together somehow more effectively defend empirical reality against the onslaught of ideology and fanaticism. [full version]

There was plenty of nonsense long before the internet and 24 hour news, but it's probably true that these developments helped to amplify and speed the spread of nonsensical claims, though I'd assert that 24 hour news (plus radio to some extent) is more responsible than the internet.

As for solving the nonsense problem through better science education, I do agree that better critical thinking skills would be helpful, that's true by definition I suppose, but that's not enough. Nobody can be an expert on health care, global warming, and all the other important issues they face. The underlying scientific, economic, political, sociological, etc. issues are too difficult (in some cases even for the experts). To overcome that, we have to rely upon people we can trust, often experts who can help to guide us to the correct decisions, but sometimes it's a trusted intermediary. Critical thinking skills can help us determine who to listen to, but it still comes down to trusting that you are getting the best possible analysis of the problem

For good or bad -- I'm still making up my mind about that -- I think that a trust that was once there is gone, at least to some degree. People believed Walter Cronkite, they trusted scientists, Dr. Spock had all the answers about how to raise your kids, but trust in the media, scientists, politicians, doctors, and so on has eroded (yes, economists too). I'd cite 24 hours news and its ilk as part of the reason, but I'm not sure that's been the fundamental driving force behind the change.

Maybe people are right to be more skeptical of the information they receive -- maybe they trusted too much in the past (and there could be an overreaction during the adjustment, causing trust to fall even further). If so, then the increase in uncertainty brought about by declining trust in experts and other sources of information would be consistent with the appearance of more nonsense in the public discourse attempting to fill the void.

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links for 2009-12-04

2009-12-05T13:04:00.001-08:00

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Economist's View - 5 new articles

2009-12-04T22:48:00.001-08:00

"Enough Posturing Politics. Time to Let the Experts Lead"

Jeff Sachs says that in order to make progress on curtailing greenhouse gases, we need to get politicians out of the way and involve "scientists, engineers and ordinary citizens ... in a true discussion about our common future, and especially the tradeoffs, costs and choices":

Enough posturing politics. Time to let the experts lead, by Jeffrey Sachs, Commentary, CiF: We can only marvel at the disarray. Here we are, 17 years after the signing of the UN framework convention on climate change, two years after the decision in Bali to agree a new climate policy, one year after Barack Obama's election, and days out from the Copenhagen conference. Yet a real global strategy to avoid catastrophe remains elusive.

Yes, there is some progress. ... The mayhem, however, is at least as great. Greenhouse gas concentrations in the atmosphere continue to mount, and will do so for years or decades to come. The Wall Street Journal, America's biggest circulation paper, rails each day against climate science. Backroom deals in the US Congress with industrial lobbies threaten to eviscerate already watered-down proposals for limiting carbon emissions. A vote on the US legislation has been postponed till next spring at the earliest, and a similar bill has just been defeated in Australia.

The truth is that even if we reach a political agreement, we're not yet on track to achieve practical, significant and sustained progress... – we've somehow turned a life-and-death challenge into a scrum. After Copenhagen, which probably will be concluded with a patch-up accord, it will be vital to change paths from the one we've been on essentially since before Kyoto in 1997.

We've debated for years about who should control emissions, by how much, when, and according to binding or non-binding commitments. Yet we can't settle these issues without also getting into the details about the deployment of low-carbon technologies, social behaviors and the quantitative realities of energy systems, transport technologies, food production, water scarcity, and population trends. We will continue to go around in circles until we are much more systematic in bringing scientific and engineering realities to the table. Our negotiations need much greater grounding in our true options and their costs.

These issues are tough and complex. Each nation's plausible choices depend on what technologies will be available and when. ... We will need, in short, a lot more brainstorming than negotiation, at least until the world's plausible options and trade-offs come into view. When can low-carbon power plants truly be brought online? When will electric vehicles be ready for mass sales? Will carbon capture really work and if so, where? Which countries and regions ... have the right kind of geology to store carbon underground, and who is going to monitor it? Dare we advocate a massive revival of the nuclear power industry, in a world fraught with nuclear proliferation? During two years of lead-up to Copenhagen, the official negotiations never gave a place for such questions to be posed, much less answered. ...

We have spent a lot of time debating the merits of tradable permits versus taxation but have failed to understand that operational policies must go far beyond either instrument. The future of nuclear power, for instance, depends not so much on tradable permits as on issues of safety, reliability, and risks of proliferation or terrorism. Similarly emissions trading may eventually spur the use of carbon capture and sequestration, but only after several such plants have been tried on the public expense, to investigate the real engineering and costs of possible technologies, and the real feasibility of safe, long-term storage in geological sites. The scale-up of solar and wind power will depend on land use choices, the future of the power grid, and the ability to store power.

The costs of these approaches can only be judged after more thorough testing and analysis. Thus the side payments that rich countries will have to make to poor ones to adopt such technologies can't yet be determined precisely. When the EU or any country announces their contribution to the poorer countries in Copenhagen, the number will be pulled out of the hat, and probably far too low. It's past time to do ... the real financial homework.

Perhaps it's no surprise we are stuck. Climate change is the most complicated issue the world has faced. Complex – but not hopeless. It's time to put the expertise at the front table, not to supplant public debate and discussion but finally to inform it. Copenhagen should be the end of negotiation by politicians with technical issues kept in the shadows or ignored. Let's get scientists, engineers and ordinary citizens involved in a true discussion about our common future, and especially the tradeoffs, costs and choices. Together we can prove that our world is still capable of reaching long-range agreements when our children's lives and wellbeing hang in the balance.

Economist's View

Feldstein: The Dollar is the World's Primary "Investment Currency"

Obama Says Banks Should Lend More

Redirect

links for 2009-12-14

"Defining Success for Climate Negotiations in Copenhagen"

Weekly Claims for Unemployment Insurance Increase Slightly

"How Have Quantitative Financial Models Been Used and Misused?"

links for 2009-12-09

Krugman versus Bartlett on Job Creation

The Administration’s Job Creation Proposal is Inadequate

"On the Consequences of Nominal Wage Flexibility"

links for 2009-12-08

"The President's Job's Initiative Doesn't Measure Up"

The Relationship Between Budget Deficits, Fed Independence, and Inflation

links for 2009-12-07

Stiglitz: Too Big to Live

Paul Krugman: An Affordable Truth

Fed Watch: Structural and Cyclical

links for 2009-12-06

Did Bank Executives Lose Enough to Learn their Lesson?

Deposits in Failed Banks as a Percent of GDP

Will Deficits Bankrupt Our Grandchildren?

links for 2009-12-05

"Why Welfare Reform Fails its Recession Test"

"Can Science Fight Media Disinformation?"

links for 2009-12-04

Economist's View - 5 new articles

Economist's View - 6 new articles

Economist's View - 3 new articles

Economist's View - 4 new articles

Economist's View - 4 new articles

Economist's View - 3 new articles

Economist's View - 3 new articles

Economist's View - 4 new articles

Economist's View - 3 new articles

Economist's View - 4 new articles

Economist's View - 6 new articles

Economist's View - 5 new articles

Economist's View - 2 new articles

Economist's View - 3 new articles

Economist's View - 5 new articles