Category: Economics
Benign liquidity traps
Stefan Homburg has a new paper on this topic. I don’t quite get how the model hands together, but still the effort alone strikes me as very real progress in this area:
Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach zero, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan´s performance and resolves puzzles associated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.
Recent Declines in Labor’s Share of US Income
That is a new and important paper by Robert Z. Lawrence. It is a little hard to excerpt, but the core messages are pretty simple:
1. Labor and capital are mostly complements.
2. The recent problems of labor are due to a lack of capital, not substitution of capital for labor.
If Lawrence is right — and he has plenty of data on his side — a lot of what you read about these topics is wrong, at least circa the status quo. And the idea that we need stiffer taxes on capital income could be disastrously off base. This paper is interesting throughout, yet I predict it will be largely ignored for its inconvenient nature.
For the pointer I thank Robin Hanson.
Guy Verhofstadt nails it on Greece
I am angry Mr Tsipras, because let’s face it. We have been sleepwalking towards a Grexit. For five years now. And the past months we are even running towards it, with our eyes open.
With your eyes open. But, it is not you who is going to pay the bill. Who is going to pay the bill are the ordinary Greeks! Losing 30 – 40 per cent of their purchasing power, of their income.
I am going to be very clear today on what we have to but especially what you have to do. And you know it very well, from the beginning. You have to deliver a package of in depth structural reforms. And when I’m talking a package, I am talking about a precise plan. A roadmap. A clear calendar. No more intentions. We are 6 months after the elections and we have seen nothing.
Do you want a Grexit maybe? It is certainly not what your people want.
What Greece needs are
– concrete proposals to get rid of the clientelistic system. And concrete measures to fight corruption.
– a roadmap to dramatically downsize the public sector: we need to see the exact number of civil servants that won’t be replaced.
– to transform the public banks into a healthy private financial sector
– to open the markets and jobs currently closed for too many young people.
We need to see an end date on when this is going to happen. also here no intentions We need to see the texts of the legal proposals, calendar, legislation.
– to end the privileges of the shipowners, the military, the orthodox church, the Greek islands and not to forget the politcial parties, including yours because you also have the loan of a public bank. I do not see the difference between you and Samaras, physically yes, but not on the content on the substance.
Another difference is that you have a mandate. Never there was a Greek prime minister with such as strong mandate. A double mandate. One in the parliamentary elections. One from the referendum.
The Greek people are fed up with the way Greece has be run the last decades. Change it!
But we also have our responsibility. The euro group need to respond to it with a new approach. We need to create what every currency union has: a real political and economic union. With a debt redemption fund for everybody, every member state not only for Greece. Like it exists in every sustainable currency union.
Mr Tsipras, but first thing first. You have to come forward with your reform program. This is not a chicken and the egg discussion.
It is your choice.
How do you want to be remembered? As an electoral accident who made its people poorer? Or as a real revolutionary reformer?
Don’t fall in the PASOK trap. Don’t betray your people.
Because 80 percent want to stay in the euro.
Show that you are a real leader and not a false prophet.
(My speech in the Eplenary this morning)
The pointer is from the heroic Hugo Dixon. And here is Guy on video, via Michael Creswell.
*Markets without Limits: Moral Virtues and Commercial Interests*
That is the new book by Jason F. Brennan and Peter Jaworski. I like my own blurb for it:
“There are many books on the morality of commerce and market commoditization, but this one is better than the others. It is better argued, penetrates into the issues more deeply, and most of all it is right.”
China question of the day
How many China share halts r due to shares pledged as collateral by controlling shareholder who now faces loans called in and losing stake?
That is from @merysavery, via Christopher Balding. By the way, the Chinese central bank is now doing open market operations for ailing stocks.
A very particular theory of political leadership
I don’t mean this to apply to any specific country, but the recent reaction of Chinese policymakers to their stock market crash got me thinking.
Imagine two equilibria. In the first, repression is harsh. Policymakers don’t have to do such a good job with the economy, because they keep their jobs no matter what.
In the second equilibrium, people recently have come out of the first equilibrium, and so they do not trust policymakers very much. They judge policymakers by outcomes, and so policymakers feel compelled to perform and to deliver high rates of economic growth.
When the tailwinds are positive, political stability is fairly high and policy is good and growth is robust too, the best of all possible worlds. Policymakers take a long-term perspective because the favorable tailwinds still enable them to meet the expectations of the citizenry, and the long-term perspective keeps them in power for a while to come. Of course you can think of catch-up growth, and the seizing of low-hanging fruit, as one form of positive tailwinds.
But recall that the “citizen trust contract” with policymakers is ultimately a fragile one and based on a series of quite short-term evaluations. When the tailwinds are less positive, the policymakers must take on a much shorter time horizon. They will prop up stock prices now, or try to, even if that is foolish. They are quite afraid to show their impotency as policymakers in some realms, for fear of looking weak more generally. Their favorable performance in the previous periods was in fact based on relatively modest levels of talent advantage, relative to other potential leaders, and so they are reluctant to see the citizens asking so many questions. They want to keep all of the economic reports positive, rather than look like people who would allow 80 million citizens to lose most of their savings.
But avoiding the unpleasant outcome is not possible, and so these bad policies in turn make the tailwinds yet more negative. An unwinding begins, as both policies and outcomes become less positive, and the contract with the citizens is based on actual trust less and less.
The same leadership structure can perform either very well or very poorly, with both the same leaders and the same citizens. And the switch can come fairly quickly, and be occasioned by events which are significant but not transformative on a world-historic or even a country-historic scale.
But fortunately this is a model only, and as well all know, models are false.
Addendum: Here is Christopher Balding on recent developments in China. But he seems to be more worried since he wrote that post. At the moment, trading in 89% of the stocks on the Chinese market is halted. My own tweet was: “One subtext is how much the 2008 crash caused Chinese loss of faith in the USA.”
Which states are in the best and worst fiscal condition?
That is the topic of a new Mercatus study by Eileen Norcross. The five in best shape?:
Alaska, North Dakota, South Dakota, Nebraska, and Florida.
The five in the worst shape are:
Illinois, New Jersey, Massachusetts, Connecticut, and New York
Kozinski Indicts the US Justice System
Federal Judge Alex Kozinski (9th circuit) has written a scathing indictment of the US justice system. Kozinski starts out discussing a number of myths such as that eyewitness testimony or forensic evidence is highly reliable. Business Insider gives a quick rundown of this part of the paper but they clearly didn’t read very far because the incendiary material comes later.
Kozinski, writing in part based on his personal experience as a judge, says that prosecutors are too often running roughshod over justice:
…there are disturbing indications that a non-trivial number of prosecutors—and sometimes entire prosecutorial offices— engage in misconduct that seriously undermines the fairness of criminal trials. The misconduct ranges from misleading the jury, to outright lying in court and tacitly acquiescing or actively participating in the presentation of false evidence by police.
Discussing the Ted Stevens case he writes
Did Justice Department lawyers rend their garments and place ashes on their head to mourn this violation of their most fundamental duty of candor and fairness? No way, no how. Instead, the government argued strenuously that its ill-gotten conviction should stand because boys will be boys and the evidence wasn’t material to the case anyway.
…Instead of contrition, what we have seen is Justice Department officials of the highest rank suffering torn glenoid labrums from furiously patting themselves on the back for having “done the right thing.”
Under Imbler v. Pachtman prosecutors have absolute immunity from damages liability from misconduct committed in the course of their work. Kozinski is outraged:
Under Imbler, prosecutors cannot be held liable, no matter how badly they misbehave, for actions such as withholding exculpatory evidence, introducing fabricated evidence, knowingly presenting perjured testimony and bringing charges for which there is no credible evidence. All are immune from liability. A defense lawyer who did any such things (or their equivalents) would soon find himself disbarred and playing house with Bubba. The Imbler majority seemed reassured by the possibility that rogue prosecutors will be subject to other constraints.
…This argument was dubious in 1976 and is absurd today. Who exactly is going to prosecute prosecutors? Despite numerous cases where prosecutors have committed willful misconduct, costing innocent defendants decades of their lives, I am aware of only two who have been criminally prosecuted for it; they spent a total of six days behind bars.
…What kind of signal does this send to young prosecutors who are out to make a name for themselves? I think it signals that they can be as reckless and self-serving as they want, and if they get caught, nothing bad will happen to them. Imbler and Van de Kamp should be overruled. It makes no sense to give police, who often have to act in high pressure situations where their lives may be in danger, only qualified immunity while giving prosecutors absolute immunity. It is a disparity that can only be explained by the fact that prosecutors and judges are all part of the legal profession and it’s natural enough to empathize with people who are just like you. If the Supreme Court won’t overrule Imbler and Van de Kamp, Congress is free to do it by amending 42 U.S.C. § 1983.
Read the whole thing, there is a lot more.
Potential meteor shower markets in everything
Skywatchers hoping to see a shooting star may soon be able to order them on demand.
A group of Japanese scientists say they have a shooting-star secret formula — an undisclosed chemical mixture packed into tiny, inch-wide balls that the team hopes to eject from a satellite to create on-demand meteor showers, AFP reports.
A Japanese start-up company called ALE is partnering with researchers at multiple universities to create the artificial meteor showers, which will cost around $8,100 per meteor for buyers. The researchers said the manufactured meteors would be bright enough to be visible even in areas with light pollution, like Tokyo, assuming clear weather.
The story is here, from Sarah Lewin, and for the pointer I thank Michael Komaransky.
Sentences to ponder
He was replaced by Euclid Tsakalotos, an Oxford-educated Marxist who is considered more pragmatic than the hardline Mr Varoufakis.
And this:
Mr Tsipras also persuaded other Greek political leaders, following seven hours of talks, to back a joint statement that Sunday’s rejection of bailout terms was not “a mandate of rupture” with the eurozone.
Ricardo Hausmann on Greece
So Greece said no to a plan that was no longer on the table. Paul Krugman and Jeffrey Sachs celebrate the decision. They hope to get a debt write-down for Greece. I honestly do not understand their position. To me, the Greek debt is pretty much irrelevant. The country is not paying a single euro in interest on its debt in net terms. It has been running primary deficits ( a shortage of revenues over spending excluding interest payments). Its debt is high but the interest rate is super-low, courtesy of European taxpayers.
If Greece writes down its debts, its banks will be bankrupted. The ECB will not be able to bail them out and the banking freeze will continue, accelerating the economic collapse. I don’t see how the banks can be bailed out in a week and I don’t see how the economy can avoid the catastrophe. Sachs in Project Syndicate says that Greece has the right to remain in the euro. I don’t know what that means in practical terms. The Greeks may be as euphoric with this “victory” as Europeans were in the summer of 1914.
By the way, here is Thomas Piketty on Germany.
Why so little upward wage pressure?
One striking feature of the Thursday labor market report was the mix of declining unemployment — now down to 5.3 percent — and continuing sluggish wages, not to mention low rates of price inflation; read Neil Irwin. Normally we would expect all the demands for those new hires to boost wages more. What is going on?
I sometimes hear it argued that there is a good news aspect to this development, suggesting that the absence of wage pressures indicates there are many more people to be hired. I wonder if this argument makes sense. If we don’t observe a worker willing to take a job for current wages, how is that a cause for optimism about future reservation wages for those same workers? I would think it implies some slight pessimism about whether those individuals will end up working again. I’m not sure those workers are going to be worth so much more in the market anytime soon.
Just to jog your memory, the data do not indicate much of a stable Phillips curve.
Alternatively, you might think the employment of those remaining unemployed workers is constrained by demand side forces. I find that unlikely at this late date in the recovery but even so, this demand side hypothesis also gives no particular reason for optimism, given a very conservative Fed.
Liquidity trap models do not explain why the rate of price inflation continues to be pretty much where the Fed wants it to be, and thus they also do not explain this constellation of market forces. There is too much labor market recovery going on.
I find the most plausible explanation to be a version of The Great Reset. A lot of workers have been revalued by the market downwards, but most incumbents are not taking pay cuts in real terms because they have insider power. New hires, however, are not granted equally favorable terms. If wages are steady as new hires pick up, this is in fact upward pressure relative to the counterfactual that otherwise those wages would be falling. Flat wage are indeed what “things heated up” looks like, and it’s a good thing we had that gas price decline to bump real wages up just a bit.
On the whole, that’s not good news either.
How long does it take to introduce a new currency?
Wintergerst says introducing a new currency typically takes at least six months, and sometimes as long as two years. Artists must draw the notes, security experts then add anti-counterfeiting measures such as watermarks and special inks, and bank officials need to plan how much of each denomination is needed and get the money to banks.
“The most challenging thing was to establish efficient distribution and make sure the new currency was available everywhere,” said Boris Raguz, head of the Treasury Directory at Croatia’s central bank, who in 1993 oversaw the introduction of the country’s currency, the kuna, after the breakup of Yugoslavia.
That is from Matthew Campbell and Alex Webb. Here is a declaration signed by 246 Greek professors — can you guess what it says?
Might Greece see some version of hyperinflation?
Keep in mind that things can go badly under either a yes or no vote today. (I am not even sure the referendum result will make such a difference, since it is all in the subsequent deal, or lack thereof, and the terms would be different anyway.) Yet I do not think a hyperinflation is the likely result.
As things stand, Greece could run out of euros in well under a week. That is a deflationary pressure. To be sure, Greek companies are already starting to print up various kinds of scrip. But those will be media of exchange priced in terms of euros, not new media of account. The script will to some extent stabilize against deflationary pressures, by preventing a total economic collapse, but they won’t themselves cause hyperinflation. If one company prints up too much scrip, the value of that brand will fall in terms of euros. In contrast, a “domestic” medium of account is usually firmly entrenched in a classic hyperinflation.
Greece may eventually move away from the euro as a medium of account, but that likely would happen only once an alternative payment medium — perhaps the new drachma — is relatively stable in value. Again, there is no expected hyperinflation. Deposit confiscation will be required long before hyperinflation is an option, do note that is not exactly a reassuring thought. In fact hyperinflation is too slow and inefficient a way to steal from the citizenry in this setting.
An interesting set of issues revolves around bill prepayment. If you didn’t know, electronic transfers within the country are still allowed, so everyone is trying to prepay bills rather than receive a haircut on their deposits (see the link above). Various events could speed up or slow down these pressures, for instance greater stability combined with outside aid could limit deposit confiscation risk and thus lower bank deposit velocity. Alternatively, greater risk could cut either way. It could lead to more prepayment and higher velocity, but it also could induce suppliers to take actions to make prepayment harder. There are some complex options here, though still I don’t see them giving rise to a hyperinflation. Again, the key point is that even under Grexit scenarios the euro remains a medium of account for a while still, and deflationary deposit confiscation will be needed before hyperinflation could extract enough seigniorage.
As Frances Coppola points out, Grexit is a process not an event and many of the early and indeed intermediate steps already are underway.
Greece and Syriza lost the public relations battle
One of the most striking aspects of the Greek situation is just how much the Greek government has lost the public relations battle. They have lost it among the social democracies, and they have lost it most of all with the other small countries in Europe. They retain some sympathy in the American government, but we are not willing to put any money on the table and basically we want the European Union to clean up the problems for us.
If you look at the progressive economists, Stiglitz, Krugman, Piketty and Sachs all recommend a “no” vote on the referendum. Though they would not frame it this way, they are advocating a kind of extra austerity for the purposes of a greater long-run good; Greece’s primary surplus vanished some time ago, so signaling a break with Europe will only make matters tougher. You could call this “properly mood affiliated austerity,” cloaked by strange presumptions about bargaining, namely the view that a “no” vote will induce a more favorable offer. It seems, with their on the ground understanding, most Greek economists are strongly in the “yes” camp.
The progressives do have some good points and I absolutely favor significant debt relief for Greece. That said, the Greek government has handled the last few months so badly it really is incumbent on them to show they will do better. I don’t see many signs in that direction, quite the contrary, and any reasonable democratic government will ask for Greek institutional progress before putting up much more in the way of money. The entire handling of Greferendum should alert the progressives that they have been egging on the wrong horse; the heroic Hugo Dixon nails it.
I take the progressive “clustering out on a limb” here as a sign that, for better or worse, progressivism as an ideology has reached and indeed gone beyond its high water mark. The progressives are siding with a corrupt, clientist state, which won’t cut its defense spending down to Nato norms, against some admittedly imperfect social democracies, thereby sustaining the meme of powerful aggressor vs. victim, Arnold Kling telephone.
Interfluidity has an interesting but quite wrong post on how to think about Greece. International relations simply could not be run on the principles he advocates, most of all in conjunction with democratic nation states. His weakest point becomes evident when he writes:
Among creditors, a big catchphrase now is “moral hazard”. We cannot be too kind to Greece, we cannot forgive their debt with few string attached, because what kind of precedent would that set? If bad borrowers, other sovereigns, got the idea that they can overborrow without consequence, if Spanish and Portuguese populists perceive perhaps a better deal is on offer, they might demand that. They might continue to borrow and expect forgiveness, and where would it end except for the bankruptcy of the good Europeans who actually produce and save?
The nerve. The fucking nerve. Lenders, having been made nearly whole on their ill-conceived, profit-motivated punts, now fear that if anybody is nice to somebody who doesn’t deserve it, where will it end? I’d resort to that cliché about chutspa, the kid who murders his parents then seeks leniency ‘cuz he’s an orphan. But it’s really too cute for the occasion.
That’s a non-answer, with anger filling in for the required substance as to why Germany and others should allow this. “Your government is making things much worse. If you want to borrow so much more from us, you have to play by the rules and also stop spitting in our face and calling us Nazis and terrorists while negotiating” is more relevant — and yes relevant is the right word here — than any point he makes.
A political program has to be something that voters could at least potentially believe, and international negotiations therefore cannot stray too far from common-sense morality, including when it comes to creditor-debtor relations. That is the point which today’s progressive economists are running away from as fast as is humanly possible. And for all the Buchanan-esque and public choice points about “rules of the game” this one about common sense morality unfortunately has ended up as the most important.
Look at this way: if you lost a public relations battle to Germany, you are probably doing something very badly wrong.