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Wednesday, November 02, 2011
NYTimes.com: Four Nations, Four Lessons
Friday, September 23, 2011
The Case for more quantitative easing
No Extra Credit
By JOE NOCERA
What if everything that is happening in Washington right now is just meaningless noise?
What if the Obama jobs plan, the coming deliberations of the supercommittee, the debate over taxing millionaires — what if none of it is likely to make a whit of positive difference for the economy? What if the only thing that matters is something Congress and the president rarely mention, and can do nothing about?
I’ve come to believe this is the case. What is killing the economy is lack of credit. In the aftermath of an asset bubble, invariably the result of too-loose credit, banks don’t just tighten their standards; they practically shut down.
This was true during the Great Depression, and it’s been true during the Great Recession. And until normal credit standards return, economic growth will continue to be stunted. “Overreaction to the credit bubble is now the knee on the throat of the economy,” says my friend Lou Barnes, a mortgage banker at Premier Mortgage Group in Colorado.
Not long ago, Lou sent me a powerful new piece of evidence, a presentation put together by Paul Kasriel, chief economist for Northern Trust. Titled “If Some Dare Call It Treason, Was Milton Friedman a Traitor?” (the title will become clear shortly), it has the force of revelation.
The first part of the paper is spent “dispelling the nonsense” (Kasriel’s words) that factors besides credit are the root of the problem. He persuasively mocks the idea that “uncertainty” is holding back companies from borrowing. (“Uncertainty,” Kasriel told me, “is the last refuge of economists who can’t explain what is going on.”) Ditto for onerous taxes, record budget deficits and lack of demand.
He then documents “a post-WW II record” credit contraction, before moving on to a surprising solution: more quantitative easing from the Federal Reserve, which is essentially the buying of bonds from investors by the Fed, using money it prints, as Kasriel freely admits, “out of thin air.”
That this solution is controversial is not lost on Kasriel; his title is an obvious play on Rick Perry’s comment that continued quantitative easing by the Fed chairman, Ben Bernanke, would amount to borderline treason. But that’s where his reference to Friedman comes in. Kasriel is absolutely convinced that if the great conservative economist were alive today, he would be leading the charge for quantitative easing. It’s all we’ve got left.
In the 1930s, the Fed’s tight money policy compounded the lack of credit and sent the country into the Depression. Decades later, Milton Friedman was the economist who most persuasively proved that point. Bernanke, a student of the Depression, took that lesson to heart; his willingness to flood the system with liquidity during the financial crisis prevented a repeat.
It is also what led Bernanke to try the first two rounds of quantitative easing. “Banking under normal circumstances is a transmission mechanism from the Fed to the economy,” Kasriel told me. “That transmission mechanism is broken.” Quantitative easing is not nearly as efficient at expanding credit as having the banks involved, but it does work. During the decade of stagnation in Japan, Kasriel points out, Friedman urged its central bank to expand the money supply and buy bonds — exactly what Bernanke has been doing.
The main argument against the printing of money is that it raises the odds of inflation; even the esteemed Paul Volcker is worried about it, as he wrote in Monday’s Times. But Kasriel is convinced that the bigger fear right now is deflation, and that the expansion of credit by the Fed should be seen in combination with the contraction by the banks. In that larger context, the Fed’s move no longer looks inflationary. It looks instead like the only means we’ve got right now to create badly needed credit.
There is much resistance to another round of quantitative easing, not just from G.O.P. presidential hopefuls, but from many in the political establishment. Yet it’s worth noting that the reason Volcker is esteemed today is because, 30 years ago, as Fed chairman, he stuck by a monetary policy — a severe tightening, in his case — that he believed in despite fierce denunciations. His willingness to chart an unpopular course led directly to the economic revival of the 1980s.
Today, Ben Bernanke is every bit as vilified as Volcker was back then. Yet the Fed remains politically independent, and like Volcker, he has the right to chart the course he believes best, without political interference. The course he has charted is quantitative easing. Kasriel is utterly convincing that this is the right course. Bernanke should make the Fed’s independence matter.
Source: New York Times
Tuesday, September 20, 2011
The Economist | The proper diagnosis: Profligacy is not the problem
The proper diagnosis
Solving the euro-zone mess means understanding the nature of its ills. And by insisting it is just about budget deficits, too many Europeans show they don't
MISDIAGNOSIS is not, in itself, malpractice. Everyone, be they doctors or central bankers or politicians, makes mistakes. But when the misdiagnosis involves ignoring some symptoms and persisting in treatments that aren't working, it is not so easily excused. And that is what is going on with the euro, where a stress on demanding austerity has eclipsed the need to boost confidence.
Friday, September 16, 2011
How Big? A Caption Contest
President Obama with Treasury Secretary Geithner, while NEC Director Gene Sperling looks on.
Check out this caption contest from Freakonomics' Blog:
Tuesday, September 13, 2011
Selection effect
Marginal revolution:
I love this example of the importance of selection effects:
During WWII, statistician Abraham Wald was asked to help the British decide where to add armor to their bombers. After analyzing the records, he recommended adding more armor to the places where there was no damage!
The RAF was initially confused. Can you explain?
You can find the answer in the extension or at the link.
Wald had data only on the planes that returned to Britain so the bullet holes that Wald saw were all in places where a plane could be hit and still survive. The planes that were shot down were probably hit in different places than those that returned so Wald recommended adding armor to the places where the surviving planes were lucky enough not to have been hit.
Thursday, September 08, 2011
Thursday, September 01, 2011
How To Get More Free Dropbox Storage With Your School Email Address [News]
via MakeUseOf by Bakari Chavanu on 7/28/11
Millions of us use the free in-the-cloud, file sharing and syncing service Dropbox who allow you to increase your free storage by using their referral system. When you get someone else to sign up for a Dropbox account, you get an extra 250MB of additional space.But now if you're a student or educator with a .edu email address, you can get double the credits for referrals. That's 500MB per friend you invite. With enough Dropbox space, you can nearly replace the local documents folder on your computer with your Dropbox account, which means accessing your content from any online computer.
Dropbox is a great tool for students who work between two or more computers. Plus, the file sharing features of Dropbox are useful for group projects in school.
When you refer a friend and he or she actually signs up for a Dropbox account, your storage space will be doubled again. You can get up to 8GB of free space using the referral process.
Source: How-To Geek
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Monday, August 29, 2011
Saturday, August 27, 2011
6 Blogs That Will Help You Understand Economics
One of the most common questions of the last few years has been "how did we get into this mess?" Understanding why the global economic problems occurred, and what issues are currently relevant, isn't easy. TV pundits and politicians have their opinions, but they're often contradictory, resulting in further confusion.But worry not, layman economists! Although economics is complex, it doesn't necessarily need to be out of your grasp. There are numerous blogs across the Internet that provide interesting, timely information and argument about the economy of both today and tomorrow. More importantly, the econ blogs out there are written in a language you can actually understand.
Calculated Risk
Dive into the posts themselves, however, and you'll find that Calculated Risk does a pretty good job of summarizing what's important and leaving out what isn't. The blog also does regular round-ups that point out the most important news of the last week and the most important upcoming announcements.
Calculated Risk doesn't delve much into economic history or theory, but it's an amazing blog for people who want to learn about what's happening right now. They also have really awesome graphs!
Carpe Diem
Carpe Diem is also one of the few blogs that has been posting positive economic news on a fairly regular basis. If you're a glass-half-full kind of person you'll probably enjoy this blog.
China Financial Markets
While published in a blog format, China Financial Markets is more like a single-article online magazine. New posts occur only about once a week, but they're incredibly long and very detailed – I'd say the average post is between 1,000 and 2,000 words. This is probably the hardest blog listed here to understand, and at least part of that difficulty is due to the fact that the posts may touch on people, objects and locations you've never heard of before. It's an incredibly insightful blog, however, and well worth your time.
Freakonomics
You won't find much serious economic talk on this blog, but what you will find are engaging posts about economics that are easy to read and easy to understand. If you're very new to reading about economics, and you're not ready to jump into the heavier stuff just yet, reading Freakonomics for awhile can get you into the right state of mind – and the fact that this blog isn't serious business doesn't mean you won't learn anything.
The Big Picture
Created by Barry Ritholz (the author of Bailout Nation), a financial journalist and money manager, The Big Picture provides timely posts about current economic events and laces them with engaging, well written commentary. Although the author of this blog has Wall Street ties, this is not a blog built to sell the author's services or trumpet Wall Street's successes while neglecting its failures. Instead, The Big Picture acts as a watchdog – many of the blog's posts are about how poor behavior on the part of Wall Street is having negative economic consequences.
The Conscience of a Liberal
The Conscience of a Liberal is a bit of a pessimistic blog (at least at the moment) so be warned that you may come away deeply afraid that you and everyone you know will lose their jobs and never be able to find another one, ever. There is a reason why the New Yorker once ran a comic depicting Krugman as a street preacher foretelling the end of days.
Conclusion
Reading these blogs won't necessarily turn you into an economics professor overnight. These blogs will, however, give you a much better perspective on current events. So what are you waiting for? Start learning, real good!Hey Facebookers, make sure to check out MakeUseOf page on Facebook. Over 24,000 fans already!
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Saturday, August 20, 2011
Burton Malkiel on Investing | FiveBooks | The Browser
Five good books on investment.
http://thebrowser.com/interviews/burton-malkiel-on-investing
http://thebrowser.com/interviews/burton-malkiel-on-investing
Friday, July 22, 2011
Saturday, June 04, 2011
ONE: The app every American should own
TUAW
My brother and I frequently discuss the fact that, though many Americans are passionate about a wide variety of issues affecting our country, few seem to actually take the time to do anything about it. And who can blame them? Many Americans are so overworked, underpaid, and in fear of how they'll make their mortgage payment or health insurance premium next month that they may not have time to attend a political rally or contact their representative on a certain issue? Well, now there's an app that makes it easier for the average Joe to take political action and promote change -- all from his iPhone.
ONE Campaign is essentially a call-to-action app. It lists a number of political issues or advocacy movements and gives you instant access to proven projects that are working to combat the issues (like vaccines for children, for example). You can then enlist your Twitter or Facebook friends to help spread the word and join movements that are important to you. But the best thing about the app is that it gives you instant tools so you can actually take political action. With a few taps you can call your Congressman or sign a petition to support your cause. The app knows who your Congressional leaders are based on the zip code you enter. So many political action apps are solely news-focused. They tell us the bad things that are happening and leave us angry or distressed. The ONE app allows us to take productive action on an issue as easily as we download a song. ONE Campaign is a free download.
ONE: The app every American should own originally appeared on TUAW - The Unofficial Apple Weblog on Sat, 04 Jun 2011 08:00:00 EST. Please see our terms for use of feeds.
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Monday, May 23, 2011
Tuesday, May 17, 2011
Google Plays the Yield Curve
Greg Mankiw's Blog
Click on graphic to enlarge.
I was fascinated a story in today's Wall Street Journal. Apparently, Google is sitting on $37 billion in cash, but nonetheless decided to sell $3 billion worth of bonds. Why? To take advantage of low interest rates.
It is like reverse maturity transformation. The banking system borrows short and lends long. Google is borrowing long and lending short. (Or maybe I should call it reverse quantitative easing, as Google is also doing exactly the opposite of what the Fed has been doing.)
Does this make sense for Google? I have no idea, and I am ready to concede that those guys are a lot smarter (and financially successful) than I am. But there is reason to be skeptical.
The chart above shows the spread between the ten-year Treasury bond and the three-month Treasury bill. The yield spread is now high by historical standards. The empirical literature on the expectations theory of the term structure (in which I have sometimes played) suggests that this is a good time to borrow short and lend long--the opposite of what Google is doing.
Maybe this time is different, and past empirical regularities will not hold going forward. But ponder this question: If you had a friend with a paid-up house, would you suggest that he now take out a long-term mortgage in order to deposit the proceeds in a money-market fund? If not, does it make sense for Google to be doing much the same thing?
Updates:
1. A smart reader sends in the following plausible explanation:
While it's true that Google has $37 billion in cash and equivalents, almost all of that $37 billion is in non-U.S. accounts (an artifact of funneling most of their profits through low-tax Ireland). They cannot spend that $37 billion in the U.S. without incurring a tax rate of 35 percent; thus, the borrowing is to finance spending in the U.S. (as opposed to abroad). All the big tech companies do the same thing (Microsoft was in the news for the same thing some 6 months ago). Thus, Google is not trying to play the yield curve so much as intertemporally arbitrage the U.S. tax code. By not repatriating the $37 billion now, they are betting that the U.S. corporate tax rate on repatriated foreign profits will be appreciably lower in the future than it is now.2. On the other hand, another loyal reader points me toward this source, which says:
The firm doesn't have the same issue with overseas cash that many of its large-cap technology peers do. Of Google's $37 billion in cash, only about $17 billion is sitting outside the U.S. Microsoft, by contrast, has no net cash remaining in the U.S., while nearly 90% of Cisco's cash is sitting outside of the country.
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Saturday, November 20, 2010
Answering the bunnies
Econbrowser
A cartoon has been making the rounds (e.g., Forbes, Zero Hedge, and Real Clear Politics) in which cartoon characters (bunnies maybe? or perhaps some other life form) ask questions about quantitative easing. I would have provided slightly different answers than did the didactic character in the cartoon, so I thought it might be fun to interject myself as a third character in the bunnies' conversation.The cartoon begins with a discussion of quantitative easing.
Bunny: What does that mean?The bunnies then go on to note correctly that one of the goals of quantitative easing is to prevent deflation.
JDH: It means that the Fed is going to buy some more long-term Treasury securities. The idea is that by buying a large amount, the effect will be to increase the price of those bonds, which would make the interest rates on those and other bonds lower. Lower interest rates might help make more loans available to small businesses and create better opportunities for households to refinance. By depreciating the dollar, the move may also encourage U.S. exports and discourage U.S. imports.
Bunny: Why do they call it the quantitative easing? Why don't they just call it printing money?
JDH: Actually no money is going to be printed. The Fed will pay for these purchases by crediting accounts that banks have with the Fed. Although it is true that banks could ask to withdraw these funds in the form of green currency, they currently are showing no interest in doing so. And before banks did start to want to withdraw these funds as money, the Fed plans to sell the assets off to bring the reserves back in. There is no plan now or in the future to "print a ton of money".
Bunny: Isn't [deflation] good? Doesn't that mean people can buy more of the stuff?The bunnies then get into a discussion of the mechanics of bond purchases by the Fed.
JDH: It would if your nominal income stayed the same. But that's exactly the problem. In episodes of deflation, people's wages go down, and many lose their jobs and can't find new ones. A decrease in the price of what we buy sounds good to us, but a decrease in the price of what we sell (namely, a decrease in our salary) does not. The experience of countries in which wages and prices are falling has been very painful, and the Fed wants to avoid this.
Bunny: But aren't food, gas, health care, and tuition prices higher than a year ago?
JDH: Yes, though items such as clothes and furniture are lower. But if we wait until deflation is established more broadly before acting, measures like the ones the Fed just announced would likely be less effective.
Bunny: Aren't bond prices higher than a year ago?
JDH: Bond prices don't enter into consumer's budgets. In fact, the higher bond prices are one indicator that deflation is a greater risk today than it was a year ago.
Bunny: Has the Fed ever been right about anything?
JDH: A study by Christina and David Romer published in the American Economic Review in 2000 found that Federal Reserve forecasts of inflation were significantly better than those generated by the Blue Chip survey of economic forecasters, the Survey of Professional Forecasters, or Data Resources, Inc. A study by Jon Faust and Jonathan Wright published in the Journal of Business and Economic Statistics in 2009 found the Fed's forecasts of inflation were significantly better than those generated by a battery of state-of-the-art time-series forecasting techniques.
Bunny: If the Ben Bernank wants to buy the Treasury bonds with the American people's money, he does not buy them from the Treasury, he buys them from the Goldman Sachs?And here is the original cartoon, in which you'll see that the bunnies' own answers are much funnier than mine.
JDH: Goldman Sachs is one of 16 different dealers from which the Federal Reserve Bank of New York solicits competitive bids. That's the way it's been done for a century, and it would be illegal for the Fed to do as the bunnies propose. From U.S. Monetary Policy and Financial Markets, 1998, Chapter 7:
The Federal Reserve makes all additions to its portfolio through purchases of securities that are already outstanding. The Federal Reserve Act [of 1913] does not give the [Federal Reserve] System the authority to purchase new Treasury issues for cash. Over the years, a variety of provisions had permitted the Treasury to borrow limited amounts directly from the Federal Reserve. Options for such loans existed until 1935. Temporary provisions for direct loans were reintroduced in 1942 and renewed with varying restrictions a number of times thereafter. Authority for any kind of direct loans to the Treasury lapsed in 1981 and has not been renewed.The reason that the Fed has always been required to buy bonds from private dealers rather than the U.S. Treasury is that the process of money creation needs to be institutionally separated from the process of financing the public debt. In fact, the potential blurring of those boundaries is one of the most important legitimate criticisms of quantitative easing.
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Thursday, November 18, 2010
Assessing Fantasy Scenarios
Econbrowser
With the EGTRRA/JGTRRA extensions and proposals for tax reform and debt reduction flying left and right, I think it behooves us to review what the theoretical (well, actually undergraduate textbook) literature and the empirical assessments suggest will be the impact of tax rate changes. I want to devote special attention to the hypothesis that there will be large dis-incentive effects on high income households should their tax rates go up, with correspondingly large negative ramifications for overall economic activity.Tax rate reductions can affect the macroeconomy in many different ways. In what is typically characterized as the Keynesian approach, the tax rate reduction increases disposable income, and hence consumption. In what is typically characterized as the supply side approach, the tax rate reduction induces an increase in labor supply.
The former effect induces an outward shift of the aggregate demand curve, while the latter shifts out the long run aggregate supply curve (since potential output depends upon the labor stock employed).
Figure 1: Shift in aggregate demand curve due to reduced tax rate, or shift in potential GDP.
Now, in typical macroeconomic modeling (in what is sometimes called the Neoclassical synthesis), both effects are included. Which effect dominates? This is an empirical issue (Interestingly, this was the topic of the first economics paper I wrote in college, during the era of Arthur Laffer and Jude Wanniski; I guess economic policy is like fashion -- some things, like platform shoes, keep on coming back).
Theory
To highlight the reason why this is an empirical issue, first consider the impact of a tax reduction on the after tax wage rate, and hence the labor-leisure tradeoff. Let IC1 be the original indifference curve, X the maximum number of hours of leisure, and Y income.
Figure 2: Impact of (after-tax) wage rate increase. Source http://www.knowledgerush.com/kr/encyclopedia/Labor_market/
The original equilibrium point is A, with XA hours of leisure, YA income. A tax rate decrease raises the after tax wage rate, making the relative price line steeper. The new equilibrium is at B. Now leisure falls to XB, as income rises to YB. Leisure is a normal good in this example. Notice that the income and substitution effects are then offsetting (XA to XC is the income effect, XC to XB is the substitution effect). Notice that the indifference curves could be drawn so that in fact leisure increased in response to the tax rate decrease. In such instances, the labor supply curve would be backward bending. Only if leisure is an inferior good (i.e., one prefers less leisure as income rises, which seems like an unappealing assumption) can one rule out the backward bending supply curve over the entire range of wage rates. (More undergrad-level notes here, and here).
Empirics
Since theory does not provide guidance on the real-world effect, we have to appeal to data. There are numerous studies addressing this question (see a meta analysis here). I'm going to refer to the numbers the Congressional Budget Office uses in its microsimulation model, here; I show Table 2 from the paper below.
Source: CBO, "The Effect of Tax Changes on Labor Supply in CBO's Microsimulation Tax Model," Background Paper (April 2007).
The table can be read as follows:
Income elasticity measures the percentage change in total hours worked that would result from a 1 percent increase in after-tax income, holding the after-tax wage rate constant. Substitution elasticity measures the percentage change in hours worked from a 1 percent increase in the after-tax wage rate, holding the worker's utility constant. The total wage elasticity is the sum of the two elasticities; it measures the percentage change in hours worked that would result from 1 percent increases in both after-tax income and the after-tax wage rate.I think it's of interest that if one is worried about the incentive effects on the top four deciles (top two quintiles), these elasticities suggest that the anxiety is misplaced. The elasticity for these two quintiles is 0.028; that is a tax rate increase that decreases after tax wages by 1 percent would decrease labor supply by these individuals by 0.028 percent(!). Notice that the elasticity is much higher for secondary earners.
Overall, the CBO concluded in the 2007 report (Table 3) that only about 4% of the static revenue loss associated with extending the EGTRRA/JGTRRA and implementing an AMT fix would be offset by the increased tax revenue associated with people working longer hours due to supply side effects.
Policy Implications
What this tells me is that in crafting tax increases, one should pay attention to incentives, but one shouldn't overstress the importance of supply side effects. And in particular, those incentive effects seem particularly small for high income earners. There is a separate question of whether a higher tax rate would disproportionately impact the consumption of high income households, which account for a large share of overall US consumption (as opposed to raising taxes on lower-income liquidity constrained households, which arguably have a higher marginal propensity to consume). To me, that makes more sense, from an analytical perspective, than fixating on the supply side effect.
Postscript: These are static effects in the CBO study. For discussion of dynamic effects, see this post.
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