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Showing posts from September, 2012

Reforming democracies

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From about a month ago, Buttonwood wrote a good piece at the Economist, addressing this important issue:
"Modern governments play a much larger role in the economy than the ancient Greeks or the founding fathers could have imagined. This makes political leaders a huge source of patronage, in the form of business contracts, social benefits, jobs and tax breaks. As the late political scientist, Mancur Olson, pointed out, these goodies are highly valuable to the recipients but the cost to the average voter of any single perk will be small. So beneficiaries will have every incentive to lobby for the retention of their perks and taxpayers will have little reason to campaign against them. Over time the economy will be weighed down by all these costs, like a barnacle-encrusted ship. The Greek economy could be seen as a textbook example of these problems." [my emphasis] And if I may add, not only the Greek economy, I can think of a lot of examples that fit this unfortunate scenario.

An overview of market monetarism

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As I briefly mentioned in my last blog post, the credit for Fed’s latest monetary stimulus is given mostly to a group of theoretical monetary economists called market monetarists. This post will recapitulate their main idea and act as a critique of some parts of their arguments.

Market monetarists reject the idea that central banks have lost ‘ammunition’ to stimulate the economy. They, in fact, believe that monetary stimulus is the only thing that can help the economy at this moment. Even under the zero-lower bound (ZLB) constraint. Evidence? A rise in stocks and investor confidence after the news of QE3, QE2, QE1, and fall of Spanish and Italian bond yields after ECB actions (in August 2011, December 2011, and most recent ones in July and September 2012). However, they claim, this isn’t enough, as central banks can do much more in impacting aggregate demand. 
Aggregate demand can, from a monetary perspective, be stimulated in two ways: quantitative easing (or any other way of increa…

More on monetary stimuli

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I left a few things out in the last week’s post on monetary stimulus. First of all, let me restate what the Fed and the ECB did. 

United States
The Fed proposed purchasing $40bn of mortgage-based securities each month until the labour market improves. They will also continue with existing policies of reinvesting their money from other asset purchases into MBSs, which will increase their holdings of long-term securities by $85bn each month. All this, the Fed hopes, will help put downward pressure on long-term interest rates and support the recovery of the mortgage market. They are now focusing strongly on maintaining their dual mandate; stable prices and low unemployment. That’s why this decision wasn’t a nominal GDP target per se, since the Fed is still sticking to its 2% inflation target. As long as the long run expectations of inflation are intact, the Fed is willing to accept mild inflation now if that would imply an improvement in the labour market. 
However, the Fed doesn’t offer a…

Graph (tables) of the week: Who's better for stocks, trade and economic freedom?

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Still on the US Presidential election, Forbes asks which potential President is better for stocks? Usually one would infer that stock performance aligns more closely with a Republican, but the following table suggests otherwise:

Perhaps this graph isn't all that accurate in measuring Presidential performance as some good market performance had nothing to do with what a President did in office. They can however be a good indicator of who's better for business, or at least who's better for Wall Street. Btw, contrary to popular belief President Obama seems to be doing pretty good in terms of stock market performance (much better than Bush for example).

However, even with this in mind, I still fear the answer to the question of which of the two candidates is better for the economy, particularly when one looks at their opinions on international trade (see here for Obama's point of view and here for Romney's).

Don Boudreaux gives them both a run around. This is the me…

The 47 percent

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The US Presidential candidate Mitt Romney held a dinner for his donors from which a hidden camera revealed a statement which was frowned upon by most of the media lately: "There are 47% of people who will vote for the President no matter what. Alright, there are 47% who are with him, who are dependent on the government, who believe that they are victims, who believe government has the responsibility to care for them, who believe they are entitled to healthcare, to food, to housing!" Read the full transcript on the NY Times, or hear the video here.

Frankly, I don't know what all the fuss is about. Ok, perhaps there aren't so many Americans that are fully dependent on the government, but I can see what Mr Romney meant when he said that, by looking at either one of these two graphs

Source: Wall Street Journal, Nicholas Eberstadt: "Are Entitlements Corrupting Us? Yes, American Character is at Stake" August 31st 2012.

I however doubt that he had this in mind,…

Monetary stimulus advocates are missing the point

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Last week the Federal Reserve announced a third round of quantitative easing (QE3), manifested through a series of measures designed to help stimulate economic activity in the US economy:  "To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put d…

Graph(s) of the week: US job recovery

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Regular readers of the blog are likely to recognize the following graph depicting a precise estimate of the jobless recovery in the United States, much more precise than the unemployment rate can show: 

Or this one, showing the slow pace of adding new jobs:

Even if we think of the slow job growth as the "new normal", the upper graph still points to a disturbing picture of all the jobs lost from 2008, where the E-P ratio decreased from an average 63% down to around 58.5%. One can claim that this restructuring was necessary and that there were simply too many unsustainable jobs out there. In other words, all the jobs that got outsourced in the past decade and were kept during the booming decade, are now too costly to keep around. This allowed the business owners to release the artificially preserved jobs. Perhaps this was a necessary restructuring done by the market in order to discover new production techniques. Perhaps the crisis (the creative destruction) served its purpos…

Recovery paradigms: Fiscal consolidation or infrastructure spending?

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Note: This blog post was published as an article for the Adam Smith Institute, on 13th September 2012. For all my other ASI writings see here.

A new research paper by Alesina, Favero and Giavazzi focuses on measuring the output effect of fiscal consolidations. Basically, the paper repeats some of the points Alesina made in his previous (2009) paper co-written with Silvia Ardagna, and in his numerous texts on VoxEU. Favero and Giavazzi summarize some of the main findings here
The idea is that fiscal consolidations tend to have much more favourable effects on the economy if they are done via spending cuts alone, not via increased taxation (see the graph below), which is actually what austerity is supposed to be.

Here's the abstract: "This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based one…

Marginal Revolution University

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Tyler Cowen and Alex Tabarrok, professors at George Mason University and bloggers at the popular and highly regarded Marginal Revolution blog, have started an online University aimed at spreading the word of their "personal vision of economics" to the broader audience. A noteworthy accomplishment which I will be following closely (feel free to sign up to the University here). 
"We think education should be better, cheaper, and easier to access. So we decided to take matters into our own hands and create a new online education platform toward those ends. We have decided to do more to communicate our personal vision of economics to you and to the broader world." 
They described a few principles they intend to follow within their online University:  "1. The product is free (like this blog), and we offer more material in less time.
2. Most of our videos are short, so you can view and listen between tasks, rather than needing to schedule time for them.  The average v…

Graph of the week: global competitiveness

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The Economist compares the World Economic Forum's competitiveness index with GDP p/c:

Switzerland, Singapore, Sweden and Finland top the competitiveness list, which isn't surprising as the same group of countries usually top the freedom index categories as well. The countries that close the top 10 group are Netherlands, Germany, US, UK, Hong Kong and Japan. What is mildly surprising here is the decline of the United States, which has been dropping on the list persistently for the past four years (a quick glance at its productivity shows why). Looking at the Eurozone "periphery", it too is experiencing declining competitiveness which should hardly come as a surprise to anyone. However the reason the "periphery" countries are still above the trend-line is that they are (or at least were) relatively wealthy countries which have experienced a decline in competitiveness and productivity. In the end this amounts to their relative wealth decreasing (i.e. they are …

“Why a collapse of the Eurozone must be avoided”

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A Swedish economist Anders Aslund (senior fellow at the Peterson Institute in Washington) wrote an excellent article a few weeks ago on why a collapse of the Eurozone must be avoided under all costs. I recommend you read the whole thing
His point is partially based on a historical comparison of what happened with the break-up of three previous multi-nation currency zones, namely the ones of the Austro-Hungarian Empire, Soviet Union, and Yugoslavia. The structure of these economies differed to a great extent to the structure of the EU today, but some lessons can certainly be applicable.
His view is, and I agree, that too many economists think of a euro break-up as a mere devaluation that would benefit the exiting states. But not too many recognize the possible dire consequences this could bring to exiting countries (mostly everyone is preoccupied with what the effects will be on countries that remain in the Eurozone, or provided there is a full break-up, what will the effects be on …