Next time someone tells you that we know fiscal stimulus doesn't work because we tried it and we still have 9% unemployment, hand them a copy of this talk by Christina Romer. It reviews the evidence that fiscal policy works, and in particular that the ARRA fiscal stimulus helped prevent even higher unemployment than actually occurred.
From Ron Suskind's "Confidence Men", via Brad DeLong's Grasping Reality:
[Elizabeth] Warren was caught off guard by Romer's intensity, and her thoughtfulness.... Question after question, the two engaged in an intellectual thrust-and-parry, until finally... Romer broke her stride. "Why is it always the women?" Romer said. "Why are we the only ones with balls around here?"
Hmm, maybe I shoulda voted for Hillary in the 2008 Democratic primaries... Except back then, I feared she had a lot of the centrist, believe-what-all-the-Serious People are saying, don't-fight-the-consensus tendencies that have turned out so badly for Obama, as witness e.g. her position before the Iraq war.
Maybe Elizabeth Warren should be running for something bigger than Senate...
Do read Brad's critical review of the book... very enlightening about the book and about administration policy. (Also available at Brad's blog.)
Executives effectively raiding their workers' pension funds, says Ellen Schultz. Not that it's a surprise.
George Soros on Europe's troubles and how to avert a crisis.
I don't think his solution of a new treaty creating a unified European Treasury, is going to happen before the European situation gets much worse. I'm not sure a unified Treasury is required to deal with the current crisis, but I'm not confident Europe will be decisive enough in recognizing the fact that Greece will default, protecting and strengthening (taking over when necessary) affected banks, helping out Spain and Italy, avoiding counterproductive austerity and tight monetary policy, and so on. Things look pretty bleak for the world and US economies over the next year.
From AP (11:30 AM Sept. 16)
U.S. Treasury chief Timothy Geithner is meeting with European finance ministers in Poland, which may suggest that the U.S. is growing more concerned about Europe's direction.
The U.S. is now pushing for a more decisive solution. On Friday, European leaders pushed back, saying they want to postpone a decision on more Greek payouts until October.
Perhaps the fact that the US is pushing Europe on this should be considered positive, but it also underlines the seriousness of the situation.
Interesting post by Ed Hugh at Fistful of Euros on austerity in Latvia... goes somewhat beyond the usual point that the "success" of austerity in the Baltic republics (in the sense that they are not considered to be in imminent danger of defaulting on their debt, and in the sense that GDP is again growing) has come at the cost of enormous drops in GDP (which the current growth in GDP has still not made up). Krugman is also good on this, but Hugh's post goes into a lot of detail and argues that even in terms being able to pay their debt, things may not look so good in a few years.
What's basically been going on is "internal devaluation", i.e. massive wage and price deflation, in order to reverse the decline in competitiveness that followed Latvia's pegging its currency to the Euro. This has been accomplished in part by austerity that has been extremely contractionary, and has resulted in a massive shift toward exporting by the Latvian economy, earning it foreign exchange with which to pay euro-denominated debt. But the huge cost in macroeconomic contraction might have been partially avoided by devaluing instead of maintaining the peg (although massive devaluation, while macroeconomically stimulative through the export demand channel, may in some circumstances cause macro problems as well...).
I had held off on posting about Ireland because I read some pieces that suggested the final deal was going to involve Irish banks' bondholders taking some losses. From RTE news, I read that:
The Minister [for finance, Brian Lenihan] also said that subordinated bondholders would be dealt with aggressively but said the European partners had ruled out making senior bondholders pay as it would have a spill over effect on the euro.
See also the Financial Times. The IMF favored senior bondholders taking some losses, but the Europeans wouldn't accept it, and the Irish government caved.
What I was going to say was that the Irish problem is essentially about the fact that the Irish government decided, at the beginning of the crisis, to guarantee all of Irish banks' debts. What they should now do is repudiate that guarantee...if not explicitly, than by refusing any bailout that doesn't, effectively, involve a partial writedown. If they don't, it's likely the next Irish government will repudiate, if they can find a legal mechanism for doing so (and my guess is that they'll find *something*). The current plan is basically asking all Irish citizens to tithe themselves for years to ensure that those who unwisely lent to Irish banks fueling the Irish real estate bubble, suffer no loss. A real political winner if I ever heard of one. Sinn Fein --- that's the party that was formerly the political wing of the Irish Republican Army---has already won a byelection, in Donegal, presumably over voter anger at the economic and debt situation. Moreover, the plan will likely be contractionary in a Keynsian sense, making it still more onerous for Irish firms and workers to produce the surplus to render to the bondholders.
About two thirds of the Irish deficit is payments to uphold this guarantee of bank debt; the Irish deficit is not primarily a matter of excessive government spending otherwise.
More on Ireland and Europe from Ken Rogoff
...and on Ireland from Barry Eichengreen. No accident, I suspect, that this blast was originally published in German at Handelsblatt.
Annoyed by the fact that the Cambridge, MA based National Bureau of Economic Research (NBER) charges $5 a pop (or requires an institutional subscription) to download its working papers (with some exceptions, such as for journalists, I decided to look into where they (and the people who publish there) get their funding, since I object to publicly funded research being published in venues that are expensive for the public to get access to. Probably this is well-known to professsional economists (so if any read this thing, feel free to comment)---but the overall situation with NBER working papers seems to be that they are (primarily? entirely?) results of research done as part of NBER programs. Perhaps that means, the research is NBER-funded as well? NBER has a contract with the Commerce Department to officially determine when recessions and "stagnations" have begun, and ended. I found it relatively difficult to figure out where NBER gets its money, since googling "NBER funding", "NBER budget" and the like tends to turn up NBER research on national budgets and general economics, not surprisingly. I found this link to a page by an organization called SourceWatch interesting, though I don't have a lot of familiarity with the group. Much of the discussion seems to concern pre-2001 funding, and the introductory paragraphs are confusing. They consist mostly of quoted material, and it is unclear what is being quoted: a New York Times article about the NBER or, as seems more likely, an article from an unnamed source, critical of the NYT piece and of the NBER's then-director Martin Feldstein? In any case, the quoted material seems highly polemical even to someone as leftish on many things as I am. And sure, Feldstein is too conservative for my taste, but he gets a lot of respect from me for recognizing, at least sometimes, that Keynesian theory can be relevant, and calling for substantial fiscal stimulus on Keynesian grounds early in this recession. Nevertheless, this claim from SourceWatch is interesting:
"Between 1985 and 2001, the organization received $9,963,301 in 73 grants from only four foundations:
- John M. Olin Foundation, Inc.
- Lynde and Harry Bradley Foundation
- Scaife Foundations (Sarah Mellon Scaife)
- Smith Richardson Foundation"
All four of these are characterized (by SourceWatch, at least, in their own descriptions linked in the above quote) as very conservative, small-government/low-regulation foundations. Actually they say the Scaife foundation is no longer pushing this ideology since Sarah Mellon Scaife took over, but (I think) during the 1985-2001 period they were. I wouldn't necessarily trust SourceWatch on this (e.g. they say the Olin Foundation gave $20.5 million to "right-wing think tanks" in 2001, then give a list that includes the Brookings Institution. I'm fairly confident this is not a mistake, rather a combination of deadpan humor and a genuinely left-wing viewpoint that does see Brookings as part of the right-wing liberal establishment. But Olin is well known as a conservative foundation, so the characterization of Olin, if not of Brookings, seems reasonable.
I'm still at a loss about the pay-for-working papers policy. Perhaps this --- especially library subscriptions to it --- is a significant source of income to the NBER? NBER's working papers are definitely a respected and prestigious series that I see cited a lot (and not just by conservatives--Paul Krugman's blog links them on occasion, as does Brad DeLong's). So they can likely get a significant amount of income that way. It does seem that the goal of spreading knowledge of the results of NBER (oops, I mean covert promotion of right-wing economic ideology ;-)) might be better served by making them free to the public.
Here's Freakonomics on the NBER and the shift in directorship from Feldstein to Jim Poterba. (No opinion implied on the quality of Freakonomics books, blogs, or Steven Levitt, though.) Still, it gives you an idea of the attitude of much of the economics profession toward the NBER.
Harvard economist Greg Mankiw says it "might be worth remembering" that 70% of economists who expressed an opinion in a Wall Street Journal poll last month thought that all the Bush tax cuts should be extended, 24% thought they should for households making under $250,000/year, 6% said they should all be allowed to expire. Of rightish-leaning economists, Mankiw is one whose thoughts are often worth reading, but I'd much rather hear what he thinks on the issue (I suspect he's with the 70%) and why, than what 48 of 53 economists chosen by the right-leaning WSJ have to say. I have three main points: (1) the Journal quotes four respondents by name---they are from Northern Trust, Standard & Poors, Perna Associates, and Pierpont Securities. In other words, this is not a poll of academic economists, but of economists working for financial firms. Maybe they're good at forecasting, maybe not. I care more what people like Mankiw himself, Paul Krugman, Joe Stiglitz, Robert Barro, Barry Eichengreen, Thomas Sargent, Christina Romer, Laura Tyson, etc... think on these issues. (2) It's not clear what the basis for the judgment is supposed to be---it thus likely mixes their values regarding inequality, taxes, etc... with issues of the economic effects of tax policy. (3) Much discussion currently centers around whether or not the cuts should be made permanent. "Extended" is a very different thing; many would support extensions while we are still in a slump, but not necessarily permanent ones. For example, I'd support (along with Obama and virtually everyone else) an extension for people making under $250,000 a year as providing fiscal stimulus (though government spending, especially direct aid to states and municipalities, would be more effective), but not necessarily a permanent extension for everyone in this group,
Jon Hilsenrath article on the Fed's deliberations over the recent decision not to let its balance sheet shrink.
No time now to do a detailed analysis of FOMC member and Dallas Fed president Richard Fisher's speech, which is posted on the Dallas Fed website, though containing the disclaimer "The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System." Of course there is something in the idea that regulatory and other policy uncertainty can have an inhibiting effect on business investment, but I really, really do not think that is much of what is going on with the recovery here. Fisher's speech looks to me---after a couple of readings, but not a thorough analysis---like he is peddling the current Republican line on why the economy isn't recovering better, and I think this line is ludicrous. Yeah, I think the length of the financial reform bill is maybe an issue (but you could probably say this about any serious policy legislation these days, and probably could have said it when the economy was booming, e.g. during the Clinton presidency). Business and banks have loads of bigger worries right now than uncertainty over policy reform or future deficits. Like uncertainty about, and low expectations for, near-term demand for their products. Fisher worries that the regulatory discretion being given to the Fed creates uncertainty; you might hope some of the length of the bill is caused by trying to specify things enough to remove some of this uncertainty, and for the rest---well, there isn't really any substitute for well-excecuted regulation in some matters. Ludicrous to think *this* is the issue in the protraction of the current slump. First mention, though is given to "Fiscal Policy Uncertainty". Fisher:
By latest accounts, under the least felicitous conditions (what the Congressional Budget Office recently called an “alternative fiscal scenario”), publicly held debt bests the all-time high of 109 percent of GDP around 2025 and reaches a staggering 185 percent of GDP by 2035—more than twice the level of debt at which some economists believe significant crowding-out of private-sector economic activity occurs. This is not the baseline scenario. But the possibility of it occurring, however remote, frightens business operators, for they are uncertain not only about whether fiscal authorities will actually mitigate this risk, but also how they might go about doing so.
Okay, the mechanism of crowding-out in that remote eventuality will be higher interest rates on corporate borrowing, caused by government borrowing having driven up interest rates more generally; but we hardly see the markets anticipating that in long-term government bond rates. It's true Fisher prefaces this with "Let me turn to what I hear from businesses, the players on the field." And it's true local Fed branches try to keep in touch with local economic reality, including business sentiment. But it seems to me pretty likely you might hear many businesspeople, especially right-leaning ones (of which there are a few, I think) parroting whatever blame-the-government line the right-wing media feeds them, and one would hope that a local Fed president would do more, even in a speech to the local business community, than parrot that back.
The issue is uncertainty about --- and perhaps even more, pessimistic expectations about--- demand over the next few years.
When Fisher says:
our political leaders should muster the courage to pull up their socks and strike a better balance between the long-term need to keep government debt low and the short- to medium-term need for an appropriate level of fiscal stimulus.
could this mean he's realizing the need for a higher level of short-term fiscal stimulus, combined with assurances (which the bond markets seem to believe they have) that potential long-term deficit problems will be dealt with soon enough? Somehow, I don't think so. The fact that the phrasing is ambigous enough to permit this among other interpretations seems to me to stem from the need to restrain himself, just a bit, from seeming too nakedly partisan, or perhaps just too prescriptive, but the Greater San Antonio Chamber of Commerce can probably read the lightly-coded message just fine, and it ain't that we need more stimulus.
Uncertainty about whether the Bush tax cuts will be continued is cited as another biggie holding back the economy. Again, somehow I don't think the message is "kill 'em now, so we can stop worrying about what will happen and invest". Or even "kill 'em now, so we can worry less about future deficits and invest." I do believe tax cuts can provide fiscal stimulus, and ones targeted at lower income brackets can probably provide more; because the highest income taxpayers have a higher marginal propensity to save, tax cuts primarily benefiting them are one of the least effective fiscal instruments for boosting aggregate demand, and let me say it again, we are in a primarily aggregate-demand-limited situation here.
More than I intended on Fisher; not a full analysis, since I haven't dealt with his comments on the main Fed bailiwick, monetary policy. But overall: either some decent but in my opinion not central to the current situation, observations on policy uncertainty, plus some mush; or worrisome code for some dubious partisan points.
In the March 8th New Yorker, John Cassidy has a long piece about Tim Geithner. While presenting various points of view, it gives a lot of space, fairly persuasively, to the view that Geithner and other adminstration officials like Lawrence Summers' policy of not taking over shaky financial institutions was the right way to handle the financial crisis. The "stress tests", forcing those institutions whose financial position was deemed risky to raise new capital, is said to have been the key component.
Some key points, which I'm not expert enough to evaluate decisively off the cuff, but which need to be singled out, are:
1) Takeovers and restructuring would have imposed huge costs on the economy, outweighing the potential benefits. Cassidy does cites some who claim that the bailed-out institutions are still "wounded" and slow to lend, slowing the recovery ("wounded" is Bob Kuttner's term; Paul Krugman was using the term "zombie banks" back when he was advocating takeovers), but counterbalancing this are the metaphors like "amputating a limb" (from Lawrence Summers) for the takeover-and-restructuring process. A detailed cost/benefit analysis is missing here, and would be nice to see.
2) Raghuram Rajam of the University of Chicago's business school is appealed to for the point that bondholders needed to take a hit. It's claimed that while equityholders would have been wiped out in a takeover, bondholders might not have been hit hard enough. Why this is isn't fleshed out, but I guess it's because in a bankruptcy proceeding, which probably would have been the legal framework for takeovers, there's a definite order of precedence for creditors, with bondholders coming before equityholders (who are generally last). However, in a restructuring-style bankruptcy, where the aim might be not to liquidate, but to get an enterprise running again, it's not clear to me that such absolute precedence would hold, especially when the government might have some pretty strong powers of persuasion over some of the bondholders (many of whom were presumably in difficult straits themselves). Perhaps this mainly boils down to the possibility of protracted legal battles...a "special feature" of our system that might make this option more difficult than in other countries where it's succeeded?
As Cassidy says, "Bondholders are supposed to monitor risk-taking at firms they lend to. If they know they can rely on a government bailout, they have little incentive to do so. " Just what hit the bondholders took under the bailout as it unfolded, isn't clear in the article, though.
3) Cassidy also recognizes that takeovers would have had the advantage of punishing the executives and shareholders of some of these institutions. A big question is whether they got off too lightly. That seems to be the public perception. It is true that existing shareholders may have been diluted when companies were forced to raise capital under the stress test, if this was done by issuing new stock. But if they didn't pay a high enough price, the take-home lesson for future financial managers is that this kind of mismanagement is profitable for them. This is a recipe for repetition, unless strengthened financial regulation can help prevent managers from taking these opportunities to profit by risking the stability of the financial system, next time they present themselves.
In light of all this, one should note that Mike Konczal, guest-blogging on Ezra Klein's blog at the Washington Post, claims that Geithner is arguing hard to keep explicit caps on leverage out of the financial reform bill. He quotes a January letter from Geithner to Rep. Keith Ellison (cc: The Honorable Ben S. Bernanke) opposing fixed numerical caps. Konczal's a bit over the top in the spin he puts on some of what he quotes. Geithner's point that "The statutory leverage constraint and detailed statutory risk-based capital requirements for Fannie Mae and Freddie Mac proved to be inadequate to the task of ensuring the safety and soundness of the firms." should hardly be paraphrased as "If you put this in the bill you will be responsible for another Fannie and Freddie"---rather, a good point that *even* numerical caps can't do the whole job in the absence of a serious, committed, regulatory authority analyzing the actual situation. But the point that statutory limits can help keep things from getting out of control, even if they're not a guarantee, is a good one. It puts some weight on the right side of the scales when irrational exuberance about leverage is sweeping the financial markets.