Category: Economics

Here is a good post on that topic, hat tip to Kevin Drum.  It's not as simple as you think.  So when someone says "The government should close down insolvent banks" he needs to specify which measure of insolvency he has in mind.  It makes a big difference.

Most of you have heard about the Japanese gdp report; it implies an annualized rate of decline of almost 13 percent.  OK, they depend on exports but why is it so dire there? 

You also may have heard that the Phoenix Suns have been trying to unload All-Star players Amare Stoudemire and Shaquille O'Neal.  They are not hoping to get equal talent in return but rather they need to lower their payroll.  (Why pay $75 million a year for a fringe playoff club?)  And the New Orleans Hornets, former contenders, traded center Tyson Chandler simply to unload his salary.

I think of the Suns or Hornets as similar to a highly leveraged institution.  I don't know the debt level of their corporate structure but that is not the point.  The Suns have been spending lots in recent years toward the goal of ever-rising prices for season tickets and corporate boxes.  Does that strategy sound familiar?  If the future price hikes don't come on the main asset, they can't afford their obligations and so they will try to shed illiquid and hard-to-value assets into an unwilling market.  Sound familiar?  (As an aside, I wonder if barter is one way to jump start trading in illiquid financial assets.)

Does this sound familiar?:

"You've got a market loaded with motivated sellers and only a very
small group of buyers," one NBA executive told ESPN.com. "It's really
ugly. Owners are scared to death right now."

Institutions can have receipts and obligations which require growing revenues even if they don't have much explicit debt on their books.  I think also of the artistic non-profits which invested in expensive facilities, in the hope of ever-rising donations from their investment banker patrons.  Many other parts of the economy may be "leveraged" in this fashion, with or without high levels of debt.

Japan, of course, has high levels of government debt and also a demographic problem.  I wonder whether their future-oriented export strategies make them even more leveraged, de facto, in a manner resembling the (former) business strategy of the Phoenix Suns.

One lesson of this crisis will be how deep the concept of leverage extends.  That's another reason why this is fundamentally a crisis of sectoral shifts.

The ProPublica site maps/graphs infrastructure spending per unemployed worker against the unemployment rate but in effect that puts the number of unemployed people on both sides of the regression/graph and if there is any measurement error this can result in bias.  The graph with spending per unemployed worker is similar to the above but with a slightly more negative slope.

Mark Thoma makes fun of Judd Gregg for thinking that tax cuts pay for themselves.  Mark is right to make fun.  What a ridiculous thing to believe.  All the good economists know that it is spending increases that more than pay for themselves.  

John Hoehn, a loyal MR reader, directs my attention to the following:

The funny thing is, my job is better than that.

Here is one bit from a generally interesting article:

Fiscal stimulus will not have much effect as long as the financial system is
deleveraging. Even if that problem were to be more or less solved, the
government deficit would have to offset both the decline in industry investment
and the rise in household saving – a gap that is rising as the recession
deepens. Here, too, the public is sceptical and prone to conclude that a program
that only slows or stops the decline but fails to “jump start” the economy must
have been a waste of tax payers’ money. The most effective composition of such a
program is also a problem.

It is worth noting that Leijonhufvud is generally considered a Keynesian, not a rational expectations theorist.  In my opinion the sophisticated Keynesian view is still that the stimulus won’t work.

Read him here, commentary from Matt Yglesias.  I know all about Keynesian ditch-digging but we should keep a few points in mind:

1. Some of these expenditures will end up being permanent or at least long-term.

2. Government expenditure does increase monetary velocity in a way that boosts aggregate nominal demand.  But these higher velocity effects may not last for more than a single round of spending, which is to say they won't last long at all.

3. The second- and third-round stimulative effects of productive investments are much greater.  Production begets further production through the complementarity of the capital structure and through its ability to create profitable, sustainable jobs.

4. A lot of the stimulus will shift people from one job to another, rather than simply employing the current unemployed.  We really don't want to take people from producing something useful to producing something wasteful.

5. Many on the left are boasting that the U.S. government could borrow lots more (look at the current T-Bill rate), forgetting they used to warn us that international capital flows, as amplified through noise traders and speculators, mean that crises can arrive in a single, whiplash moment, bringing countries from riches to rags virtually overnight.  Somehow those old narratives are being forgotten, I wonder why.

Add Thomas Friedman to Tyler, myself, Lee Ohanian and others suggesting immigration as a way to alleviate the recession:

Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.

Note that the multiplier on the “buy a house, get a visa” strategy would be much larger than any possible domestic multiplier since the money would come from outside the economy (and efficiency would improve as well.)
I think there would be considerable support among economists that immigration (buy a house, get a visa), a payroll tax cut and maintaining state and local funding would be reasonably good policies in this recession (albeit not necessarily sufficient) yet these policies seem to be the ones that the political system rejects out of hand.  (See also Matt Yglesias here and here).  Now, I can understand rejecting these policies as compared to doing nothing, ala a precautionary principle, but why these policies are rejected compared to taking a trillion dollar gamble is puzzling even to someone like myself schooled in public choice.

Via Megan McArdle, lots of back and forth, definitely worth a read, you decide.

Here is a good article by Justin Lahart:

The dismal economy has claimed yet another victim: jobs for the economists who study it.

Columbia University's economics department, for example, isn't
making any new hires this year. That's in stark contrast to last year,
when Columbia poached eight economics professors from other schools,
and hired one economist out of graduate school. The University of North
Carolina at Chapel Hill, Amherst College and the University of
Minnesota all have suspended their searches for economics professors.
And Harvard University has gotten permission to hire just one person —
only after "many rounds of negotiation," according to Harvard economist
Lawrence Katz, who is handling recruiting this year. Typically, Harvard
hires two or three economics professors out of graduate school.

From The Daily Beast, with me.  This was done before the new Geithner plan was announced.  Here is one part:

Here is the closing bit:

Today I am less optimistic about that.

Here's Brad Setser:

Implicitly, Geithner and his colleagues seem to have concluded that the
“great unwind” has limited the private sector’s ability to absorb the
banks troubled assets. Key players no longer can borrow the funds
needed to make large bets on troubled mortgage-backed securities. By
providing credit to those willing to buy bad assets, the US government
hopes to push up their market price up, and in the process induce the
banks now holding these assets to sell. The US government in effect is
providing the financial system with leverage to facilitate – one hopes
– a transition to a less leveraged financial system. The amount that
private investors have to put down – relative to the amount they are
spending – is a key detail.

The post is interesting throughout.

Clive Crook asks that question about the fiscal stimulus (by the way, Paul Krugman responds to the part of the column about him).  I do think there is more of a consensus than the current debates in the media, and the blogosphere, might imply.  I take the general consensus of macroeconomics to be not too far from the position articulated by Alice Rivlin.  That means accelerate the truly stimulative parts of the proposal and ponder the rest at greater length, plus emphasize aid to state and local governments.  I'm not suggesting that you have to bow down and yield to that view, only that the view makes sense to a large number of macroeconomists.

In part the appearance of so much disagreement is driven by the fact that both MSM and the blogosphere select for opinions which deviate from the mainstream.  Many segments of MSM are willing to represent the mainstream opinion, but there is then a sense that some new point of view must be offered, if only to hold the interest of the reader or viewer.  And some parts of MSM are openly partisan and thus they skew toward extreme points of view.  In the blogosphere libertarians are overrepresented, relative to their numbers in the profession.  On the Democratic side, Paul Krugman is the most influential figure, and I would place him to the left of most Democratic economists.  Progressives, like libertarians, are overrepresented on the web, relative to their numbers in the economics profession or elsewhere.

It is good that so many different points of view are being reflected, but we need to keep the biases of our filters in mind.  Repeating a moderate view, again and again and again, isn't always the best way to attract or keep an audience.