Category: Current Affairs

The yield on Greece’s benchmark 10-year bonds soared 1.4 percentage points to 11.1 percent – more than three times that of benchmark German bonds and just below those issued by Pakistan.

There is more here.  The assessment seems to be this:

What a growing number of investors suggest is really needed is a “shock and awe” figure, enough to convince the markets that peripheral European economies will not be left to fail.

For better or worse, I do not expect such a figure is forthcoming.  I also do not see how such a figure would do more than postpone the basic problem, which is that several European economies have been pretending to be much wealthier than they really are and to make financial plans on that basis.

In the standard price-quality model, suppliers internalize the gains from higher product quality — in this case greater flight safety — through their ability to charge a higher price.  When the alternatives are "fly" vs. "no fly," however, enough days of "no fly" mean the end of the firm.  That causes the airline to favor flight resumption before it is socially optimal to do so.  The safer outcome — not flying — doesn't involve higher revenue, as it often does, such as when the roller coaster manufacturer puts in seat belts to assuage nervous parents and thus boost demand.

The "no-ash-generated-crash" outcome probably involves higher reputational benefits for the industry as a whole than for any individual firm.

On the other side of the ledger, I suspect the regulators won't let the airlines charge market-clearing prices for the first week of resumed flights (so far, airlines are telling people that the next week of flights is reserved for stranded customers).  That makes the airline insufficiently willing to resume flights, from a social point of view.

I believe that the first effect predominates here, but that is an intuitive judgment, not based on hard evidence.

Christie Romer basically says yes, Arnold Kling dissents.

I don't expect Romer to turn a speech into an academic debate and in this sense I don't fault her.  Nonetheless I did not find her account very persuasive.

I would start with the fact that output has bounced back more robustly than employment has.  AD theories per se do not explain that differential.  One simple possibility is that better management and better measurement have allowed us to identify (and fire) hundreds of thousands of low-wage people who just weren't producing much of value.  That's a real shock, even if it does not qualify as a sectoral shift in the traditional sense.

It's also the case that the rate of new job creation has been especially low.  Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements.  Tell stories as you may, but it's hard for me to see that as exclusively an AD problem.

I wonder what is the behavioral postulate for how long all these unemployed workers are all staring jobs in the face yet persistently stubborn about their appropriate nominal wage.  I'm all for behavioral economics, but I don't buy the necessary story here.

I don't want to oversell the minimum wage hike + unemployment compensation extension + means-testing hypothesis here, but surely it deserves a mention as one relevant factor.  Those are real factors too.

I also see that wages, and the job market, are more flexible today than in a long time, with so much service sector employment, so much flex-time and part-time, and such a low rate of unionization.  In most AD theories that implies the job market bounces back relatively quickly yet that is not what we observe.

A separate question is what Romer believes the major AD shock to have been.  She clearly repudiates the Scott Sumner story that monetary policy was too tight.  Is it all from the collapsed bubble in the housing market?  Keep in mind those are paper values and that the real services from the country's housing stock haven't declined.  Again, you can tell behavioral stories about the asymmetric perception of losses vs. future gains (for many people, buying a future home is now much cheaper, though perhaps they don't notice the positive wealth effect), but is that going to drive the whole cycle?

To be sure, AD is a major factor in this recession but it is not the entire story by any means.  In major recessions usually it is AD and AS forces together.

Most of all, the Romer essay convinces me that current economic policymakers — not to mention many bloggers — should not be so certain they understand what is going on.

Addendum: I sometimes have the feeling that commentators on the left reject the "real shocks" hypothesis because they think it implies government can't do much to make things better.  That doesn't follow.  Most of what government does, for better or worse, is an attempt to solve a real rather than a nominal problem.  It might imply "intervention is less effective" but it also (possibly) can imply "intervention is more necessary."

Hotels filled with stranded passengers are also profiting. “I spoke to a few of my students who are doing internships in hotels,” said Ms. Fleischer of Hebrew University. “They are happy. The guests don’t leave.”

Here is a bit more.  Of course there's a stock-flow problem here, namely that "permanent residents" won't stay in hotels forever and people need to keep on coming.

Air freight is responsible for a quarter of the value of all goods moved into and out of the UK…

I believe that is a rough rather than exact estimate.  If European air travel continues to suffer, Kenya will be one of the most immediate big losers, for reasons of tourism and agriculture and flower-shipping (see my favorite economics textbook!).

Here are some general figures on air freight around the world.

Peter Boone and Simon Johnson serve up the bottom line.  Here is one good excerpt of many:

Often assistance packages of this nature just help “smart money” to get out ahead of a default.  This could be the case here; 40-45 billion euros total money could last roughly one year.  Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.