Category: Economics

Here is my column on the social changes occasioned by recessions.  Of course recessions are mostly bad and this one is no exception.  Still, one underappreciated fact is that health outcomes appear to improve in recessions, not get worse (even though health care access and coverage decline):

Sure, it's stressful to miss a paycheck, but eliminating the stresses of a job may have some beneficial effects. Perhaps more
important, people may take fewer car trips, thus lowering the risk of
accidents, and spend less on alcohol and tobacco. They also have more
time for exercise and sleep, and tend to choose home cooking over fast
food.  In a 2003 paper, “Healthy Living in Hard Times,” Christopher J. Ruhm, an economist at the University of North Carolina
at Greensboro, found that the death rate falls as unemployment rises.
In the United States, he found, a 1 percent increase in the
unemployment rate, on average, decreases the death rate by 0.5 percent.

In this recession the consumption of the wealthy is taking a bigger hit than is usually the case in a downturn:

In any recession, the poor suffer the most pain. But in cultural
influence, it may well be the rich who lose the most in the current
crisis. This downturn is bringing a larger-than-usual decline in
consumption by the wealthy.

The shift has been documented by Jonathan A. Parker and Annette Vissing-Jorgenson, finance professors at Northwestern University, in their recent paper,
“Who Bears Aggregate Fluctuations and How? Estimates and Implications
for Consumption Inequality.” Of course, people who held much wealth in
real estate or stocks
have taken heavy losses. But most important, the paper says, the labor
incomes of high earners have declined more than in past recessions, as
seen in the financial sector.

Popular culture’s catering to the
wealthy may also decline in this downturn. We can expect a shift away
from the lionizing of fancy restaurants, for example, and toward more
use of public libraries. Such changes tend to occur in downturns, but
this time they may be especially pronounced.

This paper integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture in a novel way. Studying banks in India, I find that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in non-election years, or in private bank lending. I show capture is costly: elections affect loan repayment, and election year credit booms do not measurably affect agricultural output.

I was invited to contribute to an Economist symposium on Olivier Blanchard's guest essay.  My piece is here and here is my bottom line:

Here is the complete set of essays, featuring Shiller, Caballero, Alesina, Thoma, and others.  Here is Bryan Caplan making a similar point about placebos.

I'm sure you've reading or hearing reports of the $4 trillion bailout.  I still don't know what this figure is supposed to mean, but it is incorrect to respond with something like the following: "that's really expensive, I guess we do need to nationalize the banks."  As one commentator on CR responded (approximately): "If Uncle Sam bails out the banks, who will bail out Uncle Sam?"

Bank nationalization is (possibly) cheaper when the banks have upside profit potential, which is then captured in whole or in part by the government.  But say that banks are in the red by $2 trillion for ever and all eternity.  Taking over the banks simply means that the government picks up these losses as owner.  Government ownership makes it less likely, not more likely, that bank creditors will "take a haircut."

Nationalization isn't going to solve this kind of cost problem. 

New appointee Jeremy Stein says yes:

Simply put, the government should force the banks to suspend all dividend payments," he told The Wall Street Journal in October.  "It makes absolutely no sense for the government to put money into the banks, only to see a significant fraction of it flow out again as dividends to shareholders, and in many cases, bank executives with large equity stakes."

I haven't seen much discussion of this issue.  Dividends are in general poorly understood by economists, in part because they continue to be paid when they face a significant tax disadvantage.  Surely there are cheaper ways to signal the quality of the firm.  One way of thinking about dividends is as a way to take advantage of bondholders.  Start a new firm, borrow $50, issue $50 in equity, and on day one pay $100 in dividends and by 4 p.m. declare bankruptcy.  Not a bad business model but of course neither the government nor the bondholders will let you.  This same strategy is also a way to take advantage of government subsidies and recapitalizations, even if you can't get the dividend up to one hundred percent.  So yes, I do see a case for following Stein's suggestion, at least for banks receiving government assistance above some threshold measure.

Stein, by the way, also favors this:

He advocated aggressive government audits of banks, aimed at separating
solvent ones from insolvent ones. Once that was done, insolvent banks
would be forced into closure or sale while solvent ones would be pushed
to raise more private capital. In addition to dealing with the bad bank
problem, putting the plan in place would remove much of the uncertainty
in financial markets that the government’s ad hoc approach to banks
thus far has helped instill.

A few of them are cute.

But they are starting to be asked more and more often:

Moreover, will we have the guts to impose similarly large percentage
reductions in budgets when the stimulus is supposed to end in two
years? Or will we simply add to a long-term budget problem that is
already horrendous?

Here is more.

The Fed is ready to do more, namely:

Two points are worth making.  First, defenders of large-scale stimulus point out that such measures may well not work.  That is true, but what are the conditions under which unorthodox monetary policy maybe will not work?  Low confidence and zombie banks, which are more or less the same conditions under which fiscal policy may not work either.  In that sense unorthodox monetary policy doesn't face a separate problem.

Second, cash and T-Bills have a broadly similar risk profile but cash and these other assets do not.  At some point monetary policy becomes fiscal policy too, as a quick look at the Fed's balance sheet will indicate.  So it's fiscal policy based on Treasury borrowing vs. fiscal policy based on Bernanke and money creation.  In a time of deflationary pressures, and a bad fiscal future, usually I would prefer Fed-led fiscal policy.  I do recognize that we are placing more weight on the Fed than it can bear, but of course at this point there are no good options.

This was from a story in The Washington Post:

In testimony before the House Budget Committee yesterday, Alice M.
Rivlin, who was President Bill Clinton's budget director, suggested
splitting the plan, implementing its immediate stimulus components now
and taking more time to plan the longer-term transformative spending to
make sure it is done right.

"Such a long-term investment program should not be put together
hastily and lumped in with the anti-recession package. The elements of
the investment program must be carefully planned and will not create
many jobs right away," said Rivlin, a fellow at the Brookings
Institution. The risk, she said, is that "money will be wasted because
the investment elements were not carefully crafted."

It's not a puffin, but here is a good post on the stimulus from Arnold Kling.  And read Marc Ambinder on which parts of the bill will take how long.

Steve Levitt is not sure whether this report is true:

In contrast to Levitt, I would think that the people on that list are extremely prone to buy things from telemarketers.

Gary Gorton has written another excellent paper, available here.  It explains one corner of the crisis very well and it is this kind of paper:

Recommended for anyone taking a serious interest in contemporary financial markets and the crisis.  On the question of stimulus, I recommend this discussion for anyone looking to understand why the correct multiplier is difficult to calculate.

60 Minutes had a moving piece on Sunday about Wilmington, Ohio where thousands of people are losing their jobs due to the closure of the town's largest employer, DHL.  Many people had worked at the air distribution center for decades and through no fault of their own were losing their jobs, their health insurance and in one of the hardest losses of all, their community.  Barack Obama and John McCain both talked about Wilmington in their campaigns and yet for all their talk it's clear that neither monetary nor fiscal stimulus can do much for Wilmington.

One of the things that I do find very disturbing about this recession is that it is worldwide.  World trade may fall this year for the first time since 1982. As I argued earlier, the problem goes beyond any credit crunch, which according to the story below has been solved for trade.  The problem is a lack of demand.  Here is more frightening news on the trade front. 

Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October.

Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.
Korea's exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.

A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.
"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.

Idle ships are now stretched in rows outside Singapore's harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes.

It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.