Macroeconomics

Tag: Macroeconomics

Who is Dominique Strauss-Kahn? Why Should Anyone Care?

Answers to the first question are obvious.  Strauss-Kahn is the Managing Director of the International Monetary Fund.  As undoubtedly you have heard, he was arrested recently for sexually attacking a maid in his luxury suite at a New York Hotel.  He also was expected to be a strong candidate for the Presidency of France.  His exit from the political scene is imminent.

Why should we care?  Martin Wolf in yesterday’s Financial Times answers that question. I encourage you to read the full article but the operative words are as follows:

“Mr. Strauss-Kahn proved to be a bold decision-maker, an effective politician and a competent economist.  This combination is very rare.  None of the candidates under discussion is likely to do the job as well as he did during the worst of the global and then eurozone financial crises.”

Keynes v. Hayek, Round 2

It’s here, the second major production from Russ Roberts and John Papola (all new mustaches!). Keep in mind, these guys are sympathetic (clearly) to the Austrian views.

Keynes v. Hayek, Round 2

For more on the Austrians, talk to someone from the Discovering Kirzner reading and discussion group.   And, rumor has it that The Road to Serfdom will be the book choice for the fall term reading group.

Horrific Scene in Japan

Indeed, it is just that.  If you have access to the internet or a television, you’ve probably already seen this, but here’s some absolutely astonishing footage from The Guardian.

The internet is also abuzz with discussion of its implications for Japan’s economy.  “Not good” is what jumps to mind for me, but that is evidently not a consensus view.  Here’s Larry Summers:

If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery.  It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction.

Lynne Kiesling at Knowledge Problem isn’t buying it:

Even my intro macro students, who are studying for next week’s final exam, could tell Dr. Summers that the earthquake and tsunami are a negative productivity shock, shifting the long-run Solow growth curve to the left, and that any rebuilding consumption and investment will shift the aggregate demand curve out in the short run … but those resources have been destroyed and the lives of people have been devastated.

Neither is George Mason economist, Don Boudreaux.

By this logic, Japan should have evacuated people from the buildings and triggered the earthquake and the tsunami sooner. By this logic, they should just blow up empty buildings randomly. By this logic, their $6.3 trillion stimulus spending of the past decades should have helped their economy. By this logic, they should rebuild the buildings with shovels rather than construction equipment. Or using spoons rather than shovels.

Annie Lowery at Slate discusses how it could potentially bankrupt the country (but probably won’t).

And here’s the Chart of the Day:

I guess you can make up your own minds what you care to believe.

Growth in Words and Pictures

The Economic History Blog refreshes our memories on the various types of growth:

Recently I was reminded of the distinction made by Joel Mokyr, in the Lever of Riches, between the four types of growth:

  1. The Solovian growth, after Robert Solow, which is driven by an increase of the saving rate leading to more investment and thus a jump of the production per unit of labor.
  2. The Smithian growth, after you know who, which is driven by the positive feedback between the gain from trade and division of labor (specialization).
  3. The Boserupian growth, after Ester Bosrup, when demographic expansion leads to positive size effects once some thresholds have been reach.
  4. The Schumpeterian growth, after Joseph Schumpeter, where an increase in the stock of knowledge applied to economic production leads to to the increase of the said production.

And the Visualizing Economics blog provides the visuals.

Now, this is a pretty good illustration of the taking the natural log of an exponential, I’d say.

What, Me Worry?

For those of you without enough to worry about this holiday season, Calculated Risk has the top 10 economic questions for 2011.  Most of these seem to be macro issues, and 4 and 6 seem to be pretty boilerplate — is economic growth ever not an issue?  Nonetheless, worth your perusal.

With any luck, we’ll be getting the rest of those Schumptoberfest essays up for the holidays.

The Moment of Truth

On December 1st, the President’s Commission on Fiscal Responsibility and Reform published its report on how taxes and spending patterns can be made sustainable.  For the most part, the report contains the recommendations of its two c0-chairs Republican Alan Simpson and Democrat Erskine Bowles.  The report garnered support from 11 of the 18 commission members.  I encourage everyone to at least peruse the report.  As noted in a November 11th  blog entry , it’s a serious attempt to change the unsustainable fiscal path for the U.S. Federal Government.

You Fix the Budget

 

Yesterday’s New York Time provided an opportunity for each individual to propose ways to close an estimated $400+ B Federal budget gap for 2015 and a $1.3+ B budget gap for 2030.  The exercise is structured in such a way as to show you how much “savings” is generated by each action.  For example, the complete elimination of farm subsidies would yield an estimated $14B per year.  As noted by many, including the co-chairs of the Presidents Deficit Reduction Commission (addressed in a previous blog entry), “fixing the budget” cannot be done without considering cuts in Medicare, Social Security, and Defense spending.  My first attempt can be found here.

The fundamental question, directly posed by Clive Cook in today’s Financial Times, is:  Will the President back the commission co-chairs, and thus demonstrate serious leadership, or will he – in the time honored tradition of political discourse – duck the issue?  Who will be the losers in this game of “duck, duck, goose?”

The New JEPs are Here!

Things are going to start happening to me now!

Just in time for the end of term, the new Journal of Economic Perspectives is here, the new Journal of Economic Perspectives is here.  And this quarter’s issue is chock full o’ articles* about the state of macroeconomics after the financial crisis, so that should be fun to peruse.

The new JEP also has an article titled “Activist Fiscal Policy” by Alan Auerbach and colleagues, which has been a continuing source of consternation inside and outside of the profession (see here for our previous post on this topic).  Here’s the abstract:

During and after the “Great Recession” that began in December 2007 the U.S. federal government enacted several rounds of activist fiscal policy. In this paper, we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy. Although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use, their efficacy remains controversial. We review the debate about the traditional types of fiscal policy interventions, such as broad-based tax cuts and spending increases, as well as more targeted policies. While there have been improvements in estimates of the effects of broad-based policies, much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions, such as the credit market disruptions and very low interest rates that were central features of the Great Recession. The eclectic and innovative interventions by the Federal Reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented.

It’s interesting to look through the article, if for no other reason to look at the variances in estimated multiplier effects for different policy levers.  For example, direct government purchases have a range of 1.0 to 2.5, whereas the extension of the homebuyer credit seems to be self-defeating, ranging from 0.2 to 1.0.  Federal transfers to state and local governments vary depending on whether the spending targets infrastructure, and transfers to individuals range from 0.8 to 2.2.

Wow, we really don’t have a very good idea about how this works.

*Yes, Chock Full O’ Nuts is really a coffee brand.  As we saw in class, it has a lower price elasticity than brands such as Folgers and Maxwell House.

A Serious Deficit Reduction Plan, At Last

President Obama created a deficit reduction commission that has been asked to propose ways for the United States to bring down the (annual) deficit to GDP ratio from above 8% presently to 3% by 2015.  The two committee chairs,  Alan Simpson – former Republic Senator from Wyoming – and Erskine Bowles – former Clinton administration chief of state – have published a list of contentious ideas they believe necessary to achieve the intended target.  They have not avoided controversial programs such as Social Security, Medicare, mortgage interest rate deductions, and defense spending since they recognize that serious plans require serious discussion.

Their report must be made public by December 1st, and if it garners the votes of 14 of the 18 commission members, it must face an up-down vote in each house of Congress.  I find this effort the most interesting one related to politics since the Greenspan Commission to modify the Social Security program presented its report in 1983.  I wish them good luck.  They (and we) will need if we are to make serious progress and reducing future economic instability.

Not Everyone in the US Loves QE2

As a follow-up to Professor Gerard’s post, I  draw your attention to Tom Hoenig, President of the Federal Reserve Bank of Kansas City, who has been the lone dissenter on the Open Market Committee votes on monetary policy.  He fears the consequences of our short term reactive policy making.  His position parallels that of Raghuram Rajan, among others, who note that monetary policy has done all it can and that some of the potential consequences of further monetary easing are destructive both domestically and internationally.  The Chinese and the Brazilians aren’t the only ones yelling STOP!

QE2

Those of you who think that “quantitative easing” means that we’ve relaxed the general education requirements might consider cracking a newspaper — or the virtual equivalent.

This second round of quantitative easing, or QE2 for short, is all over the news because the Federal Reserve Board (the Fed, not “the feds”) plans to “inject” $600 billion into circulation.  Out of thin air.  Wa la.

As you might expect, the dollar is down and gold is up.  And stocks are up, too, though I didn’t necessarily believe this argument.

Not everyone is happy about this, and by not everyone, I mean the Brazilians and the Chinese. Keep an eye on this one.

The Fiscal Train Wreck at the End of the Tunnel

Courtesy of a former student of Professor Gerard, Lawrence faculty and students have access to the Roubini website.  I encourage you, especially those of you interested in either international economics or macroeconomics, to pay regular visits to the site.  Recently, Nouriel Roubini – after whom the site is obviously named – penned a short opinion piece entitled “U.S. Fiscal Policy:  A Train Wreck Down the Line?” which lays out some fundamental questions that our political structure has failed to address.  Although next year’s Congress will have different interests than the current group, Roubini’s concerns (and mine too) still obtain.  Check it out.

Negative “Adds” in the Bond Market

Ah, my favorite macro thought experiment

Slate has a very nice piece on investors buying US Treasury bonds that yield negative interest rates! Now, why on earth would someone buy a bond with a negative interest rate? Though the answer is not complicated, it is more than a sentence explanation, so I will let you read it for yourself.  Let me just say, inflation is involved.

For those of you not versed in corporate finance (or “core-fin,” as it’s known), the article provides a good summary of how debt markets work.

The Great Depression vs. The Great Recession

Come one come all to Wednesday’s talk by Professor Finkler about parallels between the Great Depression of the 1930s and the Great Recession that was recently declared over.   The presentation will highlight the lessons to be learned from the Great Depression and to what degree we have learned them.  The talk will take place in Steitz Hall 102 at 4:30, Wednesday, October 20th.

Roubini Global Economics (RGE) Available

The Roubini Global Economics (RGE) University Program has just launched and is now available to Lawrence University at www.roubini.com.  We are one of the first schools to get on board with this program so that is our good luck.

You will need to log in, at which point you can check out the Site Navigation Guide for the University Program (you’ll need to be logged in to see this page).  We are quite fortunate to have access to the Roubini research, and I know you will find this useful as you root around in there.

Nouriel Roubini is an economics professor at New York University and something of an iconic figure, known as Dr. Doom.  Even The Daily Show taps into Roubini’s notoriety.

So, please check out the resource and let us know what you think.  We have surprisingly good access to the RGE University Program, and they are anxious to hear your feedback.

Global Competitiveness

The U.S. is number 4 according to the  global competitiveness survey just released by the World Economic Forum.  It dropped from second to fourth in the past year.  Switzerland, Sweden, and Singapore (is there something about S?) lie above the US.  What’s behind these rankings?  Should anyone care?  See today’s Financial Times Lex column for both an editorial opinion on the survey and for a link to the full report.  The website for the report contains profiles of each country as well as informative commentary about its meaning.

Krugman vs. Rajan on the Causes of and Responses to US Economic Stagnation

Paul Krugman rejects the claims that Raghuram Rajan makes about why the US entered the financial crisis.  Furthermore he argues that the cause is not particularly important and that more macroeconomic policy stimulus is needed until the US returns to pre-recession levels of employment and GDP.  Rajan argues that such stimulus is partly the reason why the crisis was created and that fundamental reform is required.

Cafe Hayek provides links to both articles in a recent posting.

Raghuram Rajan responds to criticism from Krugman and Wells. Much of his response will be familiar to Cafe Hayek readers but it is convenient to have all of Krugman’s mistakes about the housing bubble assembled in one place.

Is the Dominance of Economics History?

A couple of friends and colleagues have alerted me to a recent Financial Times piece by Gideon Rachman, urging folks to “sweep economists off their throne.”

The basic insight is that economists often model things with the claim that our models can inform the future.  He suggests we are more like historians than physicists, and it’s right time we admitted it already.

With the exception of a few deluded Marxists, historians know that their work cannot be used to predict the future. History can suggest lessons and parallels and provide wisdom – but what it cannot do is provide a sociological equivalent of the laws of physics. Yet this seems to be the aspiration of many economists, who notoriously suffer from “physics envy”.

In our corner, we have The Undercover Economist, Tim Harford, with a robust defense of the good guys, pointing out that there is more to economics than predicting recessions.  In fact, it’s not even clear that the profession pretends that this is of much consequence to “what economics is” (see here for elaboration).

Though, even as a staunch supporter, Harford cannot bring himself to defend macroeconomic, conceding that “macroeconomic models have proved fairly useless.”

Extending the Bush Tax Cuts: A Mostly Resounding Yes

The Economist invites a group of economists whether the Bush tax cuts should be extended.  For those of you who follow Washington politics, this has been a meat-and-potatoes contentious issue for some time, so I was interested to see what the big thinkers of the profession are saying.

To a man, the answer is some form of yes.

  • Tom Gallagher of the International Strategy & Investment Group says, “Yes, but only for a short period.”
  • Michael Bordo of Rutgers University says, “Yes, their benefits outweigh their costs.”
  • A personal favorite of mine, Alberto Alesina of Harvard, recommends that we “maintain the cuts and reduce spending to trim deficits.”
  • Columbia’s Guillermo Calvo exclaims, “Yes!, as the rich will drive recovery.”
  • Only Oregon’s Mark Thoma offers a partial dissent, saying “only some, and the saved revenue should be recycled.”

A more complete accounting of the replies here.  The responses are quick reads, and are filled with economic logic that you have probably heard somewhere before.

Or at least let’s hope so.

UPDATE: Former Obama OMB director Peter Orszag weighs in in today’s New York Times.  More Thoma than Calvo.