Category: Current Affairs

How much did cutting unemployment benefits help the labor market?

by  Tyler Cowen in

Quite a bit.  There is a new NBER Working Paper on this topic by Hagedorn, Manovskii, and Mitman, showing (once again) that most supply curves slope upward, here is one key part from the abstract:

In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

There is an ungated copy here (pdf).  Like the sequester, this is another area where the Keynesian analysts simply have not proven a good guide to understanding recent macroeconomic events.

The evolution of northern Virginia

by  Tyler Cowen in

When I visited Santa Monica in January it struck me how much it reminded me of…Arlington.  Arlington is now essentially a part of Northwest, at least Arlington above Route 50 or so.  Arlington and Santa Monica have never been more alike, or less distinctive.

Parts of east Falls Church will meld into Arlington, and south Arlington will become more like north Arlington.  Real estate prices east/north of a particular line are rising and west of that line are falling.  Fairfax is definitely west of that line.

The Tysons Corner remake will fail, Vienna is not the new Clarendon, and the Silver Line and the monstrously wide Rt.7 will form a new dividing line between parts of Virginia which resemble Santa Monica and parts which do not.

Incumbents aside, no one lives in Fairfax any more to commute into D.C.  Why would you?  The alternatives are getting better and Metro parking became too difficult some time ago.  Fairfax is not being transformed, although some parts are morphing into “the new Shirlington.”  Most of it will stay dumpy on the retail side.  Annandale will stay with Fairfax, whether it likes it or not.

For ten years now I have been predicting various Fairfax restaurants will close — casualties of too-high rents — and mostly I have been wrong.  The good Annandale restaurants are running strong too.  Annandale won’t look much better anytime soon, thank goodness for that.

“Northern Virginia” is becoming two different places, albeit slowly.

Tabarrok on Econ Talk on Private Cities

by  Alex Tabarrok in

Based on my paper, Lessons from Gurgaon, India’s Private City (with Shruti Rajagopalan) I discuss private cities with Russ Roberts over at EconTalk this week.

I think the conversation went well but I haven’t heard it yet so let me also take the time to point you to my favorite recent EconTalk, Russ interviewing Greg Page, the former CEO of Cargill, the largest privately-held company in America. Their discussion covers the global food supply, false definitions of national food security, the role of prices, comparative advantage and more. It’s a great discussion.

Is Greece already seeing some fiscal collapse?

by  Tyler Cowen in

Kerin Hope from the FT reports:

A reluctance to pay taxes was much criticised by Greece’s creditors as one reason why the country needed a big international bailout. Now many Greeks are again avoiding the taxman as they bet the radical left Syriza party will quickly loosen fiscal policy if it comes to power in Sunday’s general election.

A finance ministry official confirmed on Friday that state revenues had collapsed this month. “It’s normal for the tax take to decline during an election campaign but this time it’s more noticeable,” the official said, avoiding any specific figures on the projected shortfall.

However, two private sector economists forecast the shortfall could exceed €1.5bn, or more than 40 per cent of projected revenues for January.

File under “In case you had not been paying attention…”  And here is Antonio Fatás with a Grexit scenario.  That is still not what most people expect, however.

Elsewhere in central banking news…here are the real stories…

by  Tyler Cowen in

Fighters for one of the factions battling for control of Libya seized the Benghazi branch of the country’s central bank on Thursday, threatening to set off an armed scramble for the bank’s vast stores of money and gold, and cripple one of the last functioning institutions in the country.

The central bank is the repository for Libya’s oil revenue and holds nearly $100 billion in foreign currency reserves. It is the great prize at the center of the armed struggles that have raged here since the overthrow of Col. Muammar el-Qaddafi in 2011.

There is more here.  And in collapsing Yemen, the Iran-funded Houthi fighters seem to have the central bank tightly under guard.  Mario Draghi does not in fact have the toughest job in the world.

What we really need to know about QE

by  Tyler Cowen in

From the letters page of the FT:

Sir, Whether the European Central Bank chooses to embark on a programme of sovereign QE (or quantitative easing, as it used to be known) is of little day-to-day interest to most citizens of the EU. Whether the compilers of dictionaries accept that QE is now a word in its own right — as opposed to an abbreviation — is of far more relevance to us scrabble players. Using a Q without needing a free U it would rapidly be up there with Qi (the Chinese word for life force) as one of the most useful words in the lexicon.

Richard Kemmish

Surbiton, Surrey, UK

I would think that for the foreseeable future QE would be ruled an abbreviation, not a word, although enough years of macroeconomic misery eventually could flip this the other way.

“Some abbreviations, however, are acceptable Scrabble words because they have entered common parlance.”

Here are other “Q without U” words which are eligible for use in Scrabble.

The Chinese money supply

by  Tyler Cowen in

Derek Scissors reports:

Broad money M2 breached $20tn at the end of December, a staggering 70 per cent larger than in the US, where monetary policy has hardly been tight.

There’s a tremendous amount of liquidity, the problem is no one is using it. Growth in narrow money M1 has collapsed. It was a dangerously excessive 32.4 per cent in 2009. It was a dangerously anemic 3.2 per cent in 2014.

M1 is money being held ready for use in anticipated transactions. It should correlate very well with GDP, which is a sum of transaction values. But while M1 flies around over time, GDP growth barely budges in comparison. It strains credulity that the amount of money held for use could grow at one-tenth the speed in 2014 as it did in 2009, yet growth in uses of that money (GDP) drops less than 2 points.

The FT post is of more interest generally on Chinese economic statistics.

The Danish domino?

by  Tyler Cowen in

The Danish central bank has cut its deposit rate even deeper into negative territory as it fights to keep its currency peg against the euro steady ahead of an expected sovereign quantitative easing programme from the European Central Bank.

The Swiss National Bank last week threw in the towel on its currency ceiling versus the euro, heightening interest in Denmark’s longer-standing peg.

To lessen the attraction of depositing money in Denmark the central bank lowered its deposit rate from minus 0.05 per cent to minus 0.2 per cent, according to a statement from the bank.

It is wrong to claim that Switzerland and Denmark (and Cyprus?) are the first countries to leave the eurozone, but not uninstructive either.  There is more here, hat tip goes to my Twitter feed, and a bit more detail here.  This is further evidence that credibility, for central banks, is an international public good and thus arguably undersupplied.  And if the Danes cut their peg, I am loathe to call this a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.

Addendum: Scott Sumner comments.

Do central banks need capital?

by  Tyler Cowen in

Here is the abstract of a 1997 Peter Stella paper:

Central banks may operate perfectly well without capital as conventionally defined. A large negative net worth, however, is likely to compromise central bank independence and interfere with its ability to attain policy objectives. If society values an independent central bank capable of effectively implementing monetary policy, recapitalization may become essential. Proper accounting practice in determining central bank profit or loss and rules governing the transfer of the central bank`s operating result to the treasury are also important. A variety of country-specific central bank practices are reviewed to support the argument.

More concretely, I am not persuaded by the view that a kind of sheer internal commitment to good outcomes, however sincere, can sustain a peg or nominal target.  The outside world always impinges on the logic of commitment, and thus capital is required.  This is also why I do not agree with Scott Sumner’s claim that a truly credible Swiss target, eliminating the need to expand the SNB balance sheet to make it stick, is possible circa January 2015 or for that matter anytime soon.

I do not, however, see time inconsistency as the central problem.  More likely the government either just doesn’t want to take the specified action (e.g., Germany with higher inflation), or part of the government would like to do something but it doesn’t have enough political capital (Draghi at the ECB).  Time consistency models have some neat analytic properties but often they distract our attention from these more fundamental constraints.

The pointer is from Alen Mattich, a financial journalist who by the way has just published another detective novel, Heart of Hell.

What will European QE look like? And will it work?

by  Tyler Cowen in

Claire Jones at the FT reports:

The European Central Bank is set to unveil a programme of mass bond buying next week to save the eurozone from deflation, but has bowed to German pressure to ensure that its taxpayers are not liable for any losses incurred on other countries’ debt.

This is not a surprise.  Alen Mattich had a good Twitter comment:

How could you trust ECB promise to “do whatever it takes” if it doesn’t accept the risk of holding national sov debt on its books?

Guntram B. Wolff has an excellent, detailed analysis, worth reading in full, here is one bit:

So the purely national purchase of national sovereign debt would either leave the private creditors as junior creditors, or the national central bank has to accept negative equity. What would negative equity mean for a central bank? De facto it would mean that the national central bank, that has created euros to buy government debt, would have lost the claim on the government. It would still owe the euros it has created to the rest of the Eurosystem.(4) The Eurosystem could now either ask the national central bank to return that liability, which it is unable to do without a recapitalisation of its government. Or, the Eurosystem could decide to leave the claim standing relative to the national central bank. In that case, the loss made on the sovereign debt would de facto have been transferred to the Eurosystem. In other words, the attempt to leave default risk with the national central bank will have failed.

…Overall, this discussion shows that monetary policy in the monetary union reaches the limits of feasibility if the principle of joint and several liability at the level of the Eurosystem is given up.

An important open issue is whether the ECB could buy Greek bonds, given that they are up for restructuring and (presumably) the Bank cannot voluntarily relieve Greece of any debt (see Wolff’s discussion).  There are plenty of rumors that Greece will indeed be excluded from any QE program, unless you imagine they settle things with the Troika rather more quickly than they are likely to.  Yet a bond-buying program without Hellenic participation doesn’t seem so far from hurling an “eurozone heraus!” painted brick through their front window in the middle of the night.

Overall, shuffling assets and risk profiles between national monetary authorities and national fiscal authorities would seem to accomplish…nothing.  Not buying up the debt of your biggest problem country also seems to accomplish nothing, in fact it is worth than doing nothing.

Here is my 2012 column on how the eurozone needs to agree on who is picking up the check.  They still haven’t agreed!  In the meantime, Grexit is a very real possibility, through deposit flight, no matter how badly Greek citizens may wish their country to stay in.

So, so far I am not so optimistic about this whole eurozone QE business, even though in principle I very much favor the idea.  It is again a case of politics getting in the way of a problem which does indeed have a (partial) economic solution.  The only way it (partially) works is if it (implicitly) bundles debt relief with higher rates of price inflation.  Have a nice day.

Why did the Swiss break the peg of the franc?

by  Tyler Cowen in

Paul Krugman writes:

Two things to bear in mind. First, having in effect thrown away its credibility – in today’s world, the crucial credibility central banks need involves, not willingness to take away the punch bowl, but willingness to keep pushing liquor on an abstemious crowd – it’s hard to see how the SNB can get it back. Second, there will be spillovers: the SNB’s wimp-out will make life harder for monetary policy in other countries, because it will leave markets skeptical about whether other supposed commitments to keep up unconventional policy will similarly prove time-limited.

Brad DeLong and Scott Sumner agree the Swiss move was a bad idea.  We’re all in accord on the economics (more or less), but I am more interested in a different question.  The Swiss central bank, had it continued the peg, probably would have had a balance sheet larger than Swiss gdp.  But does this matter?  Should anyone care?  Or does that make them “too big a guy on the block”?

I see two views of the world running around in these discussions, but not always articulated as such:

1. Bureaucrats, which includes central bankers, are not so much budget maximizers as hoarders of institutional capital.  They hoard institutional capital when they should be spending it down, in the interests of the broader polity.  So this is a public choice problem, rather than a matter of macroeconomic ignorance.  When it comes to macroeconomics, we need institutional reforms which induce them or maybe even require them to spend down this capital, come what may for their personal levels of political influence.

2. Bureaucrats hoard and indeed extend institutional capital because they know how important it is to maintain the quality of significant institutions, such as central banks.  Without such capital , semi-independent central banks would soon cease to exist, to the detriment of us all.  Outside academics, however, rarely can see the importance of this factor, because they have less experience running political institutions.  When smart central bankers — which yes includes the Swiss — are apparently doing the wrong thing, it is because they are seeing more variables of the problem than we are.  They either cannot do “the right thing,” or doing that would be too costly in terms of the country’s longer-term institutional prospects.

By the way, there is also #3, which I do not find credible:

3. The Swiss central bankers suddenly became stupid and forgot their macroeconomics.

I agree there is plenty of #1 out there, maybe for Switzerland too.  But I’d like to see more debate of #1 vs. #2, because I don’t think the Swiss central bankers — praised extravagantly by many of us not too long ago — simply would tank their economy for no good reason at all.

Addendum: Here is Dean Baker’s dissent, although I think the stock market does not agree.  And Scott Sumner comments, he seems to opt for #3.  Here are useful comments from the FT.