Results for “rapid test”

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I'm not sure it will work, because it won't fix the housing market, may not restore the demands for wealth-elastic goods in a sustainable manner, may not restore the normal flow of credit to small businesses, may not lower subjective estimated risk premia, and may not fix the general disconnect between expectations and reality.  The effects on long-term interest rates are murky.  No one — and I mean no one — has a coherent story about how nominal stickiness of wages lies at the heart of our current dilemma.

Still, QEII may do some good.  Money matters, even if we don't always understand how or why, and excessively tight money has never done market-oriented economics any favors.  Think of QEII as a make-up for some earlier monetary policy mistakes.  Some of the relevant alternatives include a trade war with China or direct government employment of the unemployed and with what endgame?  QEII is not some terrifying burst of potential hyperinflation.  The TIPS market is forecasting in the range of two percent inflation and it's gone up — what — sixty basis points since August?  That's hardly the end of the Republic.  During the Reagan recovery, inflation never fell below four percent.  I've thought through "trigger models" of rapidly escalating inflation, but they don't scare me much.  The Fed simply needs to be ready to unload its heavy balance sheet without delay.

I do take seriously some of the more speculative criticisms, namely that QEII may set off bubbles in some emerging markets, or that it may break the euro (and that the euro would not otherwise break of its own accord).  Still, those hypotheses are far from established and it is difficult to believe that say three percent U.S. price inflation should bring international doom.  These factors also need to be weighed against the international and political economy costs of continued American economic stagnation.

I'm unhappy with claims that "we're not doing enough" and that therefore this is no test of the idea of monetary stimulus.  This is what QEII looks like, filtered through the American system of political checks and balances.  And if it looks small, compared to the size of our problems, well, monetary policy almost always looks small compared to its potential effects.  I'm willing to consider this a dispositive test and I am very curious to see the results.

Brad DeLong asks:

When would it be time to judge the Irish experiment in preemptive fiscal austerity to be a failure, Tyler?

The immediate question is whether Ireland had a choice in the first place.  When it comes to total external debt, private plus public, Ireland is in one of the most desperate situations.  (Be careful, though, some published figures include financial institutions to which the Irish government has no real liability and thus overstate Irish external debt by quite a bit).  Ireland doesn't have the same flexibility as do Germany and the United States, nothing close to that.  Read this article for an estimate of the change in primary fiscal balance required for Ireland; it's scary and doesn't indicate a lot of flexibility, which supports the conventional wisdom on Ireland, from the OECD, the European Commission, from Ireland itself, and arguably you add the IMF to that list as well. 

Furthermore, Ireland as a small, open economy experiences a relatively high degree of fiscal leakage.

By the way, you shouldn't simply assume that the initial fifteen plunge in gdp was due to fiscal caution; Ireland was after Iceland perhaps the most overextended country in the crisis.

Here's a Morgan Stanley analysis of Ireland, which basically suggests "it's complicated."  It also suggests a reasonable chance the current strategy will work out OK.  It is complicated, and the mere fact that spending is a component of national income accounts doesn't mean that more spending is always a good thing. 

Ireland in fact has done a negative fiscal stimulus.  Earlier, Ireland made the mistake of joining the Eurozone.  See also this study of Ireland, 1987-89, an earlier decisive and successful fiscal adjustment, in the days of the Irish Punt.  The Euro today makes matters harder for Ireland, yet that doesn't imply they have greater license to spend today, in fact it can imply the contrary.

Paul Krugman pointed out that the fiscally tighter Ireland did not have a better CDS price than the more wishy-washy Spain.  Yet Ireland has a bigger external debt problem, may be less protected by "too big to fail," is a smaller nation, and has less control over its destiny; the (roughly) equal price may reflect what is a superior Irish effort.  In any case, Spain is hardly a walking advertisement for not going the Irish route.

The Irish also hope that whatever output they "leave on the table" today, they can make up with Solow catch-up growth.

If you would like to read a brief on behalf of Irish stimulus, try this.  The author admits that Ireland would have to significantly raise corporate taxes, a former linchpin of its growth (whether you think that efficiency-enhancing or international rent-seeking, it is still true).  Is it worth it?  How much would such a policy damage Irish growth and credibility?

Kevin O'Rourke also has good but scattered writings on the topic of Irish stimulus.  His first preference is greater fiscal federalism within the EU.  Last month he also wrote that, lacking such a reform, Ireland had no choice.

This June, Irish consumer confidence hit a three-year high.  Here's one estimate that wages have been falling four to five percent a year, and will continue to fall, plus the Euro has been falling.  You could argue there has already been an adjustment in the twenty-five percent range.  None of that is proof of recovery, but there are some green shoots.  Here is the very latest report, indicating that economic growth may be resuming; admittedly it's just a forecast from the government.  Exports are showing growth and retail sales are rising slightly.

The Irish Times reports today: "For the first time in three years, there are now more reasons for hope than for despair.  This week a raft of indicators, when taken together, give grounds to believe that the foundations of a jobs-generating recovery are falling into place."

Do interpret that with extreme caution.  For various debates, follow The Irish Economy blog, including in the comments.

On these critical questions, in the pro-stimulus for Ireland posts, I don't see a level of detail which would rebut these quite mainstream, not-emanating-from-the-gamma-quadrant opinions — that the Irish did more or less the right thing in a very unpleasant situation. 

The Irish experiment remains an open book.  In the meantime, it's simply not true that the pre-emptive austerity advocates are committing some kind of economic malpractice.  Three years out from now, let's compare Ireland to the other PIIGS.

"You do not propose to a woman without absolute assurance that she'll say yes," says Ethan, and Mr. Brentan agrees.

There is broader context:

In 1972, on a park bench in Birmingham, Ala., Garner Lee Green's father proposed to her mother. The proposal came out of the blue. She said yes.

"That doesn't happen to people anymore," says Ms. Green, who is 30. And it certainly wasn't the way her husband asked her to marry him several years ago. The two of them talked for a long time about how and when the proposal would happen. "I was ready before he was, so we had to come to a meeting of the minds about a time frame. The negotiations lasted about six months," Ms. Green says.

So what are the economics?  Presumably a proposal "out of the blue" is more likely to be accepted, and offered, when there is potential disagreement about the correct "market prices" of various potential partners.  A lower status man might try to snare a higher-quality woman, perhaps by catching her off-guard, or he might be trying to signal, with his daring and panache, that he is higher status after all.

The most likely ones to accept such proposals are women who are unsure of their "quality," either on the mating market or in unmarried life.  Accepting the proposal takes on one kind of risk but relieves the woman of another.

Overall it seems that women are today more certain about the utility value of their alternatives to a surprise marriage proposal and that means they turn them down.  The proposals may seem like harmless "cheap talk" (propose to lots of women above your station in life and thus the custom persists, even if it rarely succeeds), but Google-savvy, credential-savvy women can evaluate men better than ever before and the lower status guys don't get close enough to them to try a shock proposal, much less make it stick.

Is it a prediction that rapid, surprise proposals are more common in societies where male high achievers are hard to identify in advance?  How important is inequality of income and volatility/uncertainty of income?

Perhaps for aesthetic reasons, I find the decline of the surprise proposal slightly sad (though in part reflective of some positive societal developments), and I am pleased to reaffirm that I do not believe in the consultative approach.

I thank Daniel Lippman for the pointer.

Here is my latest column, excerpt:

The second set of solutions involves taking control of insolvent banks, either by nationalizing them or declaring them bankrupt. In the past, the Federal Deposit Insurance Corporation has used the model of rapidly shuttering failed banks, and it has usually worked.

Many
analysts cite Swedish bank nationalization, from the early 1990s, as a
model, because the Swedes later reprivatized these banks and resumed
economic growth.

But Sweden nationalized only two banks. And the
Swedish banks were much smaller and easier to run than the largest
United States bank holding companies, which combine a wide range of
complex international businesses, commercial paper operations, derivatives trading and counterparty commitments.

It
is quite possible that the reputation of a nationalized bank would be
so impaired that it would incur even greater losses as its web of
commercial dealings collapsed. These far-reaching commitments are a
reason that the F.D.I.C. model of rapid shutdowns cannot be applied so
easily here.

The most obvious problem with nationalization is the
risk of contagion. If the government wipes out equity holders at some
banks, why would investors want to put money into healthier but still
marginal institutions? A small number of planned nationalizations could
thus lead to a much larger number of undesired nationalizations.

On top of that, the government doesn’t have the expertise to run large bank holding companies like Citigroup.
There is the danger that caretaker managers, with bureaucratic
incentives, will never return the banks to profitability. And
restrictions on executive pay, already enacted into law, will make it hard to hire the necessary talent.

In
the meantime, there would be increasing pressure to politicize lending
decisions – for instance, by requiring loans to the ailing automobile
industry. Talk of taxpayers capturing an “upside” is probably
unrealistic.

The plight of the American International Group,
the giant insurer, provides a cautionary tale. The government has
already effectively nationalized A.I.G., but after a government
commitment of $150 billion, the company’s losses continue to mount, and
there is no simple way to either manage it or split it up. If the
government cannot run that bailout very well, how can it run major
banks and nurse them back to profitability?

Nationalization
also puts bank debts on the balance sheet of the government without
restoring bank solvency. Once the government takes over, it is hard to
reorganize the debts of these companies without damaging the
government’s own creditworthiness and spreading the insolvency to bank
creditors. Yet if the banks are insolvent, paying off the creditors may
cost trillions.

It is becoming increasingly clear that the question is not whether to nationalize but rather whether we can afford to make whole long-term bank creditors.  Megan McArdle has some thoughts.  How much do we gain by transferring the losses away from banks and toward Europeans, insurance companies, and pension funds?  If the worst-case scenarios really are true — and they may be — that is the next question on tap.  It is of course a very ugly question.

Here is my latest NYT column.  It starts as follows:

The financial crisis is a result of many bad decisions, but one of them hasn’t received
enough attention: the 1998 bailout of the Long-Term Capital Management
hedge fund. If regulators had been less concerned with protecting the
fund’s creditors, our current problems might not be quite so bad.

Bear Stearns, Merrill Lynch, and Lehman Brothers were all major creditors of LTCM.  Given that regulation is inevitably imperfect, and cannot foresee or prevent every firestorm in advance, this was one chance to send a very stern message to those creditors.  Perhaps no LTCM bailout would have meant dire consequences at the time, but still:

…Fed inaction might have had graver economic consequences,
especially if a Buffett deal had fallen through. In that case, a rapid
financial deleveraging would have followed, and the economy would have
probably plunged into recession. That sounds bad, but it might have
been better to have experienced a milder version of a downturn in 1998
than the more severe version of 10 years later.  In 1998, there was no collapsed housing bubble, the government’s budget
was in surplus rather than deficit, bank leverage was much lower, and
derivatives markets were smaller and less far-reaching.

I’ve been reading much about LTCM in recent times, and in so many ways it was a micro- dress rehearsal for our later problems.  This column also criticizes the current now-standard practice of "regulation by deal."

Addendum: Matt Yglesias adds: " At the time I think everyone was clear on the idea that if
institutions such as LTCM were “too big to fail” that they had to be
brought into a regulatory umbrella. But as soon as it was clear that
disaster had been averted, a lot of people became complacent about
operationalizing this determination to expand the scope of regulation
and some of the key participants – especially Alan Greenspan – in the
bailout only redoubled their opposition to regulation."

Here is a good Sachs article, summarizing his views, namely that a carbon tax is not nearly enough to solve the problem.  He writes:

…low-emissions
technologies developed in the rich world will need to be adopted
rapidly in poorer countries. Patent protection, while promoting
innovation, could slow the diffusion of these technologies to
low-income countries unless compensatory actions are taken. As with
medicines, patent protection may be double edged: promoting innovation
but slowing diffusion to the poor.

Economists like to set corrective prices and then be done with it,
leaving the rest of household and business decisions to the magic of
the market. This hands-off approach will not work in the case of a
major overhaul of energy technology. We will need large-scale public
funding of research, development and demonstration projects;
intellectual property policies to promote rapid dissemination to poor
countries; and the promotion of public debate and acceptance of new
options. We will need to back winners, at least provisionally, to get
new systems moving.

While this makes a great deal of sense, I am already feeling the "yikes are we reallly up to that?" response.  Sachs also writes: 

Consider three potentially transformative low-emissions technologies:
carbon capture and sequestration (CCS), plug-in hybrid automobiles and
concentrated solar-thermal electricity generation. Each will require a
combination of factors to succeed: more applied scientific research,
important regulatory changes, appropriate infrastructure, public
acceptance and early high-cost investments to “ride the learning curve”
to lower costs in the long term. A failure on one or more of these
points could kill the technologies.

Again, this more than makes sense.  It is a sober breath of fresh air in a debate that too often looks for easy palliatives.  My worry, however, comes in Sachs’s fairly optimistic-sounding book.  He stresses that for no more than one percent of global gdp per year, we can avoid a doubling of carbon emissions, relative to pre-industrial levels, by 2050. 

I am much more pessimistic, partly for reasons Sachs already outlines.  I won’t recapitulate all of my previous writings on the topic (follow the links here), so let me give a kind of "splat" response: Chinese CO2 emissions are much worse than we had thought, China resists outside pressure, Chinese governance is often of very poor quality, China is currently subsidizing energy consumption, China thinks it is our problem to solve, China won’t automatically keep on becoming prosperous, the super eco-conscious Europeans in fact haven’t made much of a dent in the problem in terms of percentage change, the U.S. has done better on carbon emissions than most of the Kyoto signatories, the price of oil rose fivefold in a relatively short period of time without much helping, a gradual increase in carbon taxes (in a Hotelling model) can lead to more extraction today thus worsening the problem, and if the rich countries massively cut their carbon consumption the prices of coal and oil would plummet and the incentive for someone to buy and smoke the stuff will be all that much stronger.  Valuable stuff in the ground tends to be dug up and used.  And by the way, curing the ozone problem was easy and even a "simple" international organization such as WTO gets tied up in gridlock.

Did I mention that some of the world’s nations might even benefit from global warming, most of all Russia, and thus they might wish to sabotage various partial solutions and that Russia holds a permanent seat on the Security Council of the UN?  And that geo-engineering is massively risky and might be considered by some countries to be an act of war?

That’s not even all the arguments I can think of.  And no, they are not arguments for ignoring the problem but they are arguments against optimism.  As I read Sachs, the core message is: "We can solve this problem if we try."

I would sooner start with the list of these problems.  Yikes, and yes I know it might scare some people into simply letting things slide.  But if action is to have any chance of succeeding we need to understand the problem.  I’d like the book — and yes I know this is a popular book, but even popular books should advance the debate — to start with the tough stuff and tell us what to do.

Maybe the technical costs of Sachs’s fix are one percent of global gdp.  But when we consider the imperfections of institutions, I fear that the costs are much much higher.  At the end of Sachs’s article he writes:

By 2010 at the latest, the world should be breaking ground on
demonstration CCS coal-fired plants in China, India, Europe and the
U.S.; the wealthy nations should be helping to finance and build
concentrated solar-thermal plants in states that border the Sahara; and
highly subsidized plug-in hybrids should be rolling off the assembly
line. Only these steps will enable us to peer much farther down the
path of truly transformative change.

Under one meaning of the word "should," this may sound just right.  Under another meaning of the word "should," it’s further reason for thinking the proffered formula doesn’t have much chance of success.