Category: Current Affairs
The Chinese money supply
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?
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.
Frances Coppola asks
In short, did the ECB tell the SNB to remove the cap in order to clear the way for ECB QE?
Don’t stand in the way of a forthcoming freight train. There is more here.
Do central banks need capital?
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.
Henry Manne has passed away at age 86
He was one of the original builders of the GMU Law School, and an important founding scholar of law and economics, very sad news of course.
Addendum: David Henderson comments.
What will European QE look like? And will it work?
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?
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.
Poland yikes fact of the day
Fully 46 percent of Polish home loans are denominated in Swiss francs.
That is from Matt, hat tip goes to Alex T. Does anyone know the figure for Hungary?
Oh, the Swiss franc went up 39% today
By the way, it doesn’t seem to be settling at 39% up (18% as of late), but that was the FT headline. The Economist offers some commentary:
Some analysts speculated that political pressure may have caused the Swiss to abandon the policy; in November last year, a referendum campaign to force the SNB to hold 20% of its balance sheet in gold (which would have made it more difficult to maintain the cap) was defeated. But others felt that the SNB may be expecting the European central Bank to announce quantitative easing in the near future; a shift that would weaken the euro and require even more intervention to cap the franc. In a hole, the SNB may have decided to stop digging.
Swiss equities were down over thirteen percent. And this means a revaluation of Swiss-franc denominated mortgages, which are plentiful in Eastern Europe, Russia and Hungary come to mind first. And it raises the question of how much we can trust central bank commitments, looking forward…
Here is summary coverage from Neil Irwin.
Bad optics, bad PR, the culture that is Germany
…a public outcry has arisen over a town council plan to house refugees in a building that once served as a Nazi command post at the Buchenwald concentration camp.
Schwerte, a community of 50,000 south of Dortmund, has decided to move 21 refugees into the camp’s only remaining building on the outskirts of the town.
The move comes, town officials say, because all the refugee housing in the town’s jurisdiction is already filled with 200 asylum seekers, and the town doesn’t have the money to purchase temporary structures. According to the town council’s spokeswoman, “The solution is a practical one.”
The full story is here, via the excellent Mark Thorson.
The Effect of Police Body Cameras
The first randomized controlled trial of police body cameras shows that cameras sharply reduce the use of force by police and the number of citizen complaints.
We conducted a randomized controlled trial, where nearly 1,000 officer shifts were randomized
over a 12-month period to treatment and control conditions. During ‘‘treatment shifts’’
officers were required to wear and use body-worn-cameras when interacting with members
of the public, while during ‘‘control shifts’’ officers were instructed not to carry or use the
devices in any way. We observed the number of complaints, incidents of use-of-force, and
the number of contacts between police officers and the public, in the years and months
preceding the trial (in order to establish a baseline) and during the 12 months of the
experiment.
The results were that police use of force reports halved on shifts when police wore cameras. In addition, the use of force during the entire treatment period (on shifts both using and not using cameras) was about half the rate as during pre-treatment periods. In other words, the camera wearing shifts appear to have caused police to change their behavior on all shifts in a way that reduced the use of force. A treatment that bleeds over to the control group is bad for experimental design but suggests that the effect was powerful in changing the norms of interaction. (By the way, the authors say that they can’t be certain whether the cameras primarily influenced the police or the citizens but the fact that the effect occurred even on non-camera shifts suggests that the effect is primarily driven by police behavior since the citizens would not have been particularly aware of the experiment, especially as there would have been relatively few repeat interactions for citizens.)
It is possible that the police shaded their reports down during the treatment period but complaints by citizens also fell dramatically during the treatment period from about 25-50 per year to just 3 per year.
Here’s a graph of use of force reports before and during the treatment period.
Police cameras will have some negative effects. When a police officer is accused of something will lawyers have the right to subpoena years of camera footage looking for anything problematic? Think about the OJ case. Perhaps tape should be erased after one year.
Nevertheless, the results of the study are impressive. More generally, I worry that there is no solution to the problem of government mass surveillance but at the very least we can turn the cameras around and even the playing field.
On the multiplication of community college tuition subsidies
Here is some testimony from 2011 (pdf), by Mason M. Bishop:
…the myriad of job training programs funded by multiple federal agencies needs to be curtailed. Currently, the U.S. Department of Energy, the U.S. Department of Health and Human Services and the National Science Foundation are all funding community college education and training grants. The proliferation of funding for post-secondary education and training programs from Federal agencies with no experience in education and training issues, only serves to foster “mission creep,” duplication of effort and a waste of valuable resources.
Here are my earlier remarks on the new community college subsidies proposal. Here is Mason Bishop on Twitter, with further remarks.
How much does it cost to overthrow the government of Gambia?
More than 220k, apparently:
The gang allegedly numbered 18-20 people and spent $220,798 on the attack, including $4,000 on two sniper “Barret” .50 calibre rifles that the accountant who compiled their expenses said were “not really necessary, but could be very useful”. Each man had $4,000 to cover costs while they were in Gambia.
But the coup attempt failed and this week, US federal prosecutors charged a Texas businessman with conspiring with a former US Army sergeant and others to orchestrate an attack in Gambia on the last two days of 2014.
There is more here in the FT. And here is a tidbit of note:
US authorities accuse Cherno Njie, a 57-year-old US citizen of Gambian descent who made a small fortune in the housing industry in Texas, of bankrolling the coup.
The article is interesting throughout, there was at least the ostensible motive of restoring democracy to the country. I wonder to what extent he viewed this as a philanthropic rather than selfish venture.
Obama’s free community college plan
David Leonhardt writes:
The plan — which would require congressional approval — would apply to students attending a two-year college, including part time, so long as the college offered credits that could transfer to a four-year college or provided training that led to jobs.
David’s article is excellent and has much useful information:
As Reihan Salam of National Review notes, community college tuition is already low. In fact, it’s zero, on average, for lower-income families, after taking financial aid into account. Vox’s Libby Nelson wrote, “Community college tuition for poorer students is often entirely covered by the need-based Pell Grant.”
One potential implication is that by making community college universally free, the government is mostly reducing the cost for higher-income families.
Calculating the completion rate at community colleges is difficult, this estimate does some work to get it up to 38 percent. What would the completion rate be for the marginal students encouraged under the Obama plan? We don’t know, but I’ll guess at 20-30%, no more. That’s the real problem.
Furthermore some of the value of education is signaling to the labor market that you are able to finish college. I do think the learning component of education is generally more important, but for “marginally not attending community college individuals” — who are often regarded with suspicion by employers — I would not be surprised if the signaling component were one third or more of the value of a degree. To that extent, pushing more marginals into the degree funnel lowers the value of the degree for the others who were getting it already by lowering the average productivity of the pool of finishers. That would lower the efficiency gains from the program and also partially offset some of the intended distributional consequences.
Mike Konczal likes the idea, and believes it may lower higher education prices more generally. Libby Nelson at Vox considers it to be a middle class benefit. Neil McCluskey at Cato is negative. Carrie Sheffield is critical. Here is a look at potential winners and losers in the higher education sector. The plan could lead to federal money replacing state money, rather than leveraging it.
Citing the growing economy and improving labor market, Andrew Flowers noted:
…college enrollment is declining for recent high school graduates (those 16 to 24 years old). And it’s falling fastest for community colleges.
Overall my take is that the significant gains are to be had at the family level and at the primary education level, and that the price of community college is not a major bottleneck under the status quo.
Is Jennifer Lawrence Underpaid?
The Daily Beast, Business Insider and The Washington Post all argue that leaked information about Jennifer Lawrence’s pay on American Hustle indicates gender discrimination. Here’s the Washington Post:
If Jennifer Lawrence doesn’t get paid as much as her male colleagues for the same work, ordinary women don’t stand a chance.
Sony’s hacked e-mails have revealed a troubling truth — that even the wealthiest and most powerful women among us are burdened by the ever-present gender pay gap.
The picture these articles present is one of poor, little Jenny Lawrence being taken advantage of by powerful, male studio heads who are laughing all the way to the bank. Time for a reality check.
When it comes to business, Jennifer Lawrence isn’t a woman she is a multi-million dollar enterprise. Lawrence Enterprises is run not by Jennifer alone but also by a bevy of managers, agents, publicists and lawyers. If Lawrence is underpaid each of these people (quite a few of them men, by the way) are also underpaid. In particular, Lawrence is repped by CAA of which the WSJ recently wrote:
Within the entertainment industry, the glass-and-steel headquarters of Creative Artists Agency LLC is called the “Death Star,” a reference to its occupants’ reputation as cold-hearted Hollywood power brokers.
Do you think the cold-hearted Hollywood power brokers of CAA are leaving money on the table? No effing way. Which is one reason why Jennifer Lawrence is number 12 on Forbes Celebrity 100 list, coming in just below Steven Spielberg. By the way, 5 of the top 10 on the Celebrity 100 are women and number 1 on that list? Beyonce.