Month: January 2010

For investors, many of the usual bubble warning signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans.

…The Xinhua news agency quoted Goldman Sachs as saying that housing price increases had outpaced wage hikes by 30 percent in Shanghai and 80 percent in Beijing in recent years.

A popular television soap opera known as "Snail House" depicts two sisters' desperate struggle to buy an ever more unaffordable home. One sister resorts to becoming the mistress of a corrupt, married official to get money for an apartment.

Here is much more.

Paul Krugman links to some of the key pieces, or trace through Chait's blog or Manzi plus Krugman has a NYT column today on this.  I won't go through the debate as a whole (i.e., no mention of military spending or ideas as an international public good), which covers many of the basic "U.S. vs. Europe" issues, but here are a few relevant points:

1. For this debate, "levels" are more important than growth rates.  The United States has higher per capita income than most of Europe, although I don't mean to suggest that Europe is an economic disaster.  You also can try to "argue back" some of that difference by citing social indicators or leisure time, but don't focus on the growth rates.

2. If you see the United States compared with Europe, ask if the same analysis also compares the United States to the highly successful Singapore or for that matter Brazil.  If not, be wary.

3. It would be an interesting exercise to construct an "imaginary Europe," so instead of the current gdp of Italy you would sub in the output of a comparable number of Italian-Americans, and so on.  The Swedish-Americans in Minnesota get subbed in for the Swedes in Sweden, and so on.  I've never seen that done but I would like to know the answer, both with respect to per capita income and social indicators.

4. One question is whether the U.S. or Europe does a better job of elevating poor immigrants to higher income levels.  You would think egalitarians would be obsessed with this issue, but they're not.  In fact most of them hardly mention it.

5. There has never, ever been a well-functioning social democracy — in the European sense — with the size, population, and diversity of the United States or if you wish make that any two of those three.  How about any one of those three, noting that Canada isn't really such a large country?  That doesn't mean it's impossible, but keep that in mind the next time you hear talk about evidence-based reasoning.

6. Per capita growth rates or levels can be misleading, for some of the reasons mentioned above.  A country which adds a lot of low wage labor through immigration, for instance, will look worse than it ought to.  And if you cite "higher average productivity" in some parts of Europe, you are neglecting the differences between average and marginal and also the allergies to low-wage jobs in places such as France.

7. One view is to see significant pockets of poverty in Appalachia and decry there is nothing comparable in Denmark.  Another view is to see those same poor people and compare them to the poor of the European continent, which includes places such as Belarus and Albania.  Both approaches can be misleading exercises.

8. Countries have to start from where they're at.  If you're constructing policy advice, you can either build on what a country is really good at or you can try to revise the internal culture of the country.  If you're going to do the latter, come out and say so.  Most of my policy recommendations are based on the former approach, namely strengthening what (the better-functioning) countries already are good at.  I'm not suggesting that countries never change, but getting such changes right by deliberate policy interventions is very hard to do.  I wish to stress this point applies to the pro-U.S. as much as the pro-Europe side.

I'd like everyone to have a sign, which they would hold up when appropriate: "My policies seek to revise the internal culture of my country."  That's OK, but you're raising the bar for your own ideas and don't fool yourself into thinking otherwise.

Addendum: You'll find related points here.

Via Brad DeLong, here is Andrei:

Andrei Shleifer is offering an justification for what Federal Reserve Chairman Ben Bernanke calls “credit easing.”… It is, Shleifer argued at a presentation at the American Economic Association in Atlanta, the best way to get banks to resume lending. In a crisis, the price of securities – mortgage-backed, Treasury debt, packages of loans, etc. – fall to fire sale prices, well below fundamental values…. Banks with the wherewithal to make new loans… prefer to buy securities because the opportunity for profit is so tempting…. “Because asset prices are out of whack,” he said, “injecting capital into banks doesn’t restart lending.” Banks simply use the money “to buy underpriced securities… to speculate.” “Financing of new investment by banks [via lending to business] is always competing with speculation. If speculation is more attractive, it is going to draw the attention of banks,” he argued.

The solution: The Fed or the government should buy a lot of securities, so many of them that the price rises and the banks no longer find them attractive for speculation and lend instead…

The original source, from David Wessel, is here and it includes a critique from Gary Gorton.  Here are my previous posts on the Junker problem; I'm not sure I have met an economist who has never made this mistake or is it one?  One question in this case is whether the security purchases lead to that cash being recycled right back into the banking system, and thus available for lending, as Fritz Machlup had suggested in his 1940 book on the stock market and capital formation.

Warning: do not generalize.  Still, this is an interesting story:

City bankers will suffer little or no impact from the bonus supertax imposed by the government last month, according to a Financial Times poll of leading investment banks.

Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders.

The results chime with intelligence garnered by headhunters. “The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.

In many cases that will mean banks doubling bonus pools, with the cost of the tax borne by shareholders. Dividends, already under pressure as regulators force banks to retain earnings to boost capital, are likely to be hit, bankers concede.