Economic Crisis – Page 13 – artdiamondblog.com

Less Credentialed Hazlitt Got More Right than Keynes and White

Source of book image:
http://s.s-bol.com/imgbase0/imagebase/large/FC/7/0/6/9/9200000009899607.jpg

(p. C5) One of the many merits of “The Battle of Bretton Woods,” a superb history of mid-20th-century monetary affairs, is the timing of its publication. Today, as never before, central banks are printing money, suppressing interest rates and manipulating markets. You wonder where it will all end.
. . .
(p. C6) According to Mr. Steil, the recondite Bretton Woods debates failed to engage the American public as a political issue. If so, it was no fault of Henry Hazlitt’s. An editorial writer for the New York Times, Hazlitt directed persistent, withering fire against White’s and Keynes’s brainchild. (His collected editorials, titled “From Bretton Woods to World Inflation,” were published in 1984.) The conference had it all wrong, Hazlitt thundered in the Times. The IMF would subsidize unsound policies. What was wanted were sound ones.
“The broad principles should not be difficult to formulate,” the readers of the Times were reminded on the eve of the gathering in New Hampshire. Governments should balance their budgets, forswear 1930s-style impediments to free trade (quotas, exchange restrictions) and refrain from “currency and credit inflation.” And the currency itself? It should be “redeemable in something that is itself fixed and definite: for all practical purposes this means a return to the historic gold standard.”
. . .
White was a Harvard Ph.D. Keynes was, at least according to Mr. Steil, “the most innovative and iconoclastic economist of his age, if not of all time.” Hazlitt was no trained economist at all. But it was he, not the two acclaimed experts, who turned out to be right.

For the full review, see:
James Grant. “A Fateful Meeting That Shaped the World.” The Wall Street Journal (Sat., March 16, 2013): C5-C6.
(Note: ellipses added.)
(Note: the online version of the review has the date March 15, 2013.)

The book under review is:
Steil, Benn. The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order Princeton, NJ: Princeton University Press, 2013.

Children of Chinese Entrepreneurs Want to Work for Government

“Engineering student Xie Chaobo has yet to land a job.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. A1) BEIJING–Xie Chaobo figures he has the credentials to land a job at one of China’s big state-owned firms. He is a graduate student at Tsinghua University, one of China’s best. His field of study is environmental engineering, one of China’s priorities. And he is experimenting with new techniques for identifying water pollutants, which should make him a valuable catch.
But he has applied to 30 companies so far and scored just four interviews, none of which has led to a job.
Although Mr. Xie’s parents are entrepreneurs who have built companies that make glasses, shoes and now water pumps, he has no interest in working at a private startup. Chinese students “have been told since we were children to focus on stability instead of risk,” the 24-year-old engineering student says.
Over the past decade, the number of new graduates from Chinese universities has increased sixfold to more than six million a year, creating an epic glut that is depressing wages, (p. A10) leaving many recent college graduates without jobs and making students fearful about their future. Two-thirds of Chinese graduates say they want to work either in the government or big state-owned firms, which are seen as recession-proof, rather than at the private companies that have powered China’s remarkable economic climb, surveys indicate. Few college students today, according to the surveys, are ready to leave the safe shores of government work and “jump into the sea,” as the Chinese expression goes, to join startups or go into business for themselves, although many of their parents did just that in the 1990s.

For the full story, see:
MIKE RAMSEY and VALERIE BAUERLEIN. “Tesla Clashes With Car Dealers; Electric-Vehicle Maker Wants to Sell Directly to Consumers; Critics Say Plan Violates Franchise Laws.” The Wall Street Journal (Tues., June 18, 2013): B1-B2.

Source of table: online version of the WSJ article quoted and cited above.

“The Million-Dollar Question” for “Our Long Economic Slump”: Why “the Severe Downturn in Jobs”?

(p. 5) [There are] . . . two underappreciated aspects of our long economic slump. First, it has exacted the harshest toll on the young — even harsher than on people in their 50s and 60s, who have also suffered. And while the American economy has come back more robustly than some of its global rivals in terms of overall production, the recovery has been strangely light on new jobs, even after Friday’s better-than-expected unemployment report. American companies are doing more with less.
“This still is a very big puzzle,” said Lawrence F. Katz, a Harvard professor who was chief economist at the Labor Department during the Clinton administration. He called the severe downturn in jobs “the million-dollar question” for the economy.

For the full commentary, see:
DAVID LEONHARDT. “CAPITAL IDEAS; The Idled Young Americans.” The New York Times, SundayReview Section (Sun., May 5, 2013): 5.
(Note: ellipsis, and words in brackets, added.)
(Note: the online version of the commentary has the date May 3, 2013.)

$30 Million First National Bank Regulatory Costs Due to Dodd-Frank Replacing Clear Rules with Regulator “Wild Card” Leeway

(p. 1D) The president of First National of Nebraska, the nation’s largest privately held banking firm, said new federal regulatory and compliance efforts stand to cost the company as much as $30 million this year.
“It is a big uncertainty in the banking world,” said Dan O’Neill, speaking Wednesday at the company’s annual meeting in Omaha. “They are not operating off of concrete rules. A lot of it is their interpretation.”
The federal Consumer Financial Protection Bureau was formed as a result of the federal Dodd-Frank laws passed in 2010 after widespread bank failures and bailouts using taxpayer money. . . .
. . .
The bureau, he said, worries banks because there is not a “clear body of rules” from which the regulator is operating in evaluating the fairness of a bank’s business practices. He said the agency’s regulators have a lot of leeway in deciding what to do af-(p. 2D)ter examining a bank; penalties for running afoul include fines.
“So it is a bit of a wild card,” he said.

For the full story, see:
Russell Hubbard. “First National Chief Says Regulatory Costs Mounting.” Omaha World-Herald (THURSDAY, JUNE 20, 2013): 1D-2D.
(Note: ellipses added.)

In Latvia Deep Budget Cuts Lead to High Economic Growth

“A worker cleaned equipment at a new dairy factory outside Riga. The I.M.F. has hailed Latvia for its deep budget cuts.” Source of caption and photo: online version of the NYT article quoted and cited below.

It is interesting that the New York Times photographer (see above) chose to display the Latvian economic success story in bleak shades of grey and darkness.

(p. A1) RIGA, Latvia — When a credit-fueled economic boom turned to bust in this tiny Baltic nation in 2008, Didzis Krumins, who ran a small architectural company, fired his staff one by one and then shut down the business. He watched in dismay as Latvia’s misery deepened under a harsh austerity drive that scythed wages, jobs and state financing for schools and hospitals.

But instead of taking to the streets to protest the cuts, Mr. Krumins, whose newborn child, in the meantime, needed major surgery, bought a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia’s economy began to pull out of its nose-dive, he returned to architecture and today employs 15 people — five more than he had before. “We have a different mentality here,” he said.
. . .
Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.

For the full story, see:
ANDREW HIGGINS. “Used to Hardship, Latvia Accepts Austerity, and Its Pain Eases.” The New York Times (Weds., January 2, 2013): A1 & A6.
(Note: ellipsis added.)
(Note: the online version of the story has the date January 1, 2013.)

Reinhart Rogoff Result Robust: High Debt Lowers Growth Rate from 3.5 to 2.3 Percent

(p. A29) CAMBRIDGE, Mass. In May 2010, we published an academic paper, “Growth in a Time of Debt.” Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with notably lower rates of growth.
. . .
Last week, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. But they also accused us of “serious errors” stemming from “selective exclusion” of relevant data and “unconventional weighting” of statistics — charges that we vehemently dispute.
. . .
Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon.
. . .
There were just 26 cases where the ratio of debt to G.D.P. exceeded 90 percent for five years or more; the average high-debt spell was 23 years. In 23 of the 26 cases, average growth was slower during the high-debt period than in periods of lower debt levels. Indeed, economies grew at an average annual rate of roughly 3.5 percent, when the ratio was under 90 percent, but at only a 2.3 percent rate, on average, at higher relative debt levels.
. . .
The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.
In “This Time Is Different,” our 2009 history of financial crises over eight centuries, we found that when sovereign debt reached unsustainable levels, so did the cost of borrowing, if it was even possible at all. The current situation confronting Italy and Greece, whose debts date from the early 1990s, long before the 2007-8 global financial crisis, support this view.

For the full commentary, see:
CARMEN M. REINHART and KENNETH S. ROGOFF. “Debt, Growth and the Austerity Debate.” The New York Times (Fri., April 26, 2013): A29.
(Note: ellipses added.)
(Note: the online version of the commentary has the date April 25, 2013.)

The full reference to the authors’ book is:
Reinhart, Carmen M., and Kenneth Rogoff. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press, 2009.

To Avoid Economic Crises We Need to Look at Evidence from Economic History

(p. 1093) Methodologically, the most fundamental and forceful message from the book is that, by ignoring history and the fact that crises remain frequent, recurrent, episodic events–in both rich and poor countries–almost everyone, including researchers and policymakers, made themselves vulnerable to the wishful thinking encapsulated in the book’s title. There is a deeper statistical point here. Crises, and for that matter large recessions and other phenomena that are of first-order interest given their implications for economic activity, occur at quite a low frequency. They are rare events, meaning that they do not occur so frequently, at least for most countries in a short-span time series. Thus recent experience can be an unfaithful guide for scholars and statesmen alike, a good example being the complacent thinking that accompanied the erstwhile Great Moderation of recent decades even as financial pressures built up nationally and internationally. Possibly the most important lesson that readers will take away from this book is that if we are to do better in future, from our policy thinking in the chambers of power to our macroeconometric analyses in academe, (p. 1094) we need to admit the existence of, and come to grips with, a much broader universe of evidence.

For the full review, see:
Taylor, Alan M. “Global Financial Stability and the Lessons of History: A Review of Carmen M. Reinhart and Kenneth S. Rogoff’s This Time Is Different: Eight Centuries of Financial Folly.” Journal of Economic Literature 50, no. 4 (Dec. 2012): 1092-105.
(Note: italics in original.)

The book that Taylor reviews, is:
Reinhart, Carmen M., and Kenneth Rogoff. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press, 2009.

Fiscal Stimulus Packages Did Not Stimulate

(p. 686) An empirical review of the three fiscal stimulus packages of the 2000s shows that they had little if any direct impact on consumption or government purchases. Households largely saved the transfers and tax rebates. The federal government only increased purchases by a small amount. State and local governments saved their stimulus grants and shifted spending away from purchases to transfers. Counterfactual simulations show that the stimulus-induced decrease in state and local government purchases was larger than the increase in federal purchases. Simulations also show that a larger stimulus package with the same design as the 2009 stimulus would not have increased government purchases or consumption by a larger amount. These results raise doubts about the efficacy of such packages adding weight to similar assessments reached more than thirty years ago.

Source:
Taylor, John B. “An Empirical Analysis of the Revival of Fiscal Activism in the 2000s.” Journal of Economic Literature 49, no. 3 (September 2011): 686-702.

Governments Use “Financial Repression” to Lower Their Interest Payments on Debt

(p. 229) Carmen M. Reinhart, Jacob F. Kirkegaard, and M. Belen Sbrancia make a case for “Financial Repression Redux: Governments Are Once Again Finding Ways to Manipulate Markets to Hold Down the Cost of Financing Debt.” “Financial repression occurs when governments implement policies to channel to themselves funds that in a deregulated market environment would go elsewhere. . . . One of the main goals of financial repression is to keep nominal interest rates lower than they would be in more competitive markets. Other things equal, this reduces the government’s interest expenses for a given stock of debt and contributes to deficit reduction. (p. 230) However, when financial repression produces negative real interest rates (nominal rates below the inflation rate), it reduces or liquidates existing debts and becomes the equivalent of a tax–a transfer from creditors (savers) to borrowers, including the government . . .” “Financial repression contributed to rapid debt reduction following World War II. . . . It seems probable that policymakers for some time to come will be preoccupied with debt reduction, debt management, and efforts to keep debt servicing costs at a reasonable level. In this setting, financial repression, with its dual aims of keeping interest rates low and creating or maintaining captive domestic audiences, will continue to find renewed favor, and the measures and developments we have described and discussed are likely to be only the tip of a very large iceberg.”

Reinhart et al as quoted in:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 25, no. 4 (Fall 2011): 223-30.
(Note: ellipses added by Taylor.)

For the full Reinhart et al paper, see:
Reinhart, Carmen M., Jacob F. Kirkegaard, and M. Belen Sbrancia. “Financial Repression Redux.” Finance and Development 48, no. 2 (June 2011): 22-26.

Economics Should Be in “Broad-Exploration Mode”

(p. 85) What does concern me about my discipline, . . . , is that its current core–by which I mainly mean the so-called dynamic stochastic general equilibrium approach–has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one. This is dangerous for both methodological and policy reasons. On the methodology front, macroeconomic research has been in “fine-tuning” mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in “broad-exploration” mode. We are too far (p. 86) from absolute truth to be so specialized and to make the kind of confident quantitative claims that often emerge from the core. On the policy front, this confused precision creates the illusion that a minor adjustment in the standard policy framework will prevent future crises, and by doing so it leaves us overly exposed to the new and unexpected.
. . .
(p. 100) Going back to our macroeconomic models, we need to spend much more effort in understanding the topology of interactions in real economies. The financial sector and its recent struggles have made this need vividly clear, but this issue is certainly not exclusive to this sector.
The challenges are big, but macroeconomists can no longer continue playing internal games. The alternative of leaving all the important stuff to the “policy”-types (p. 101) and informal commentators cannot be the right approach. I do not have the answer. But I suspect that whatever the solution ultimately is, we will accelerate our convergence to it, and reduce the damage we do along the transition, if we focus on reducing the extent of our pretense-of-knowledge syndrome.

Source:
Caballero, Ricardo J. “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome.” Journal of Economic Perspectives 24, no. 4 (Fall 2010): 85-102.
(Note: ellipses added.)

Solow Testifies on Irrelevance of DSGE Macro Models

In Nobel-prize-winner Robert Solow’s congressional testimony, quoted below, “DSGE” is an abbreviation for “dynamic stochastic general equilibrium.”

(p. 221) Solow argues: “It may be unusual for the Committee to focus on so abstract a question, but it is certainly natural and urgent. Here we are, still near the bottom of a deep and prolonged recession, with the immediate future uncertain, desperately short of jobs, and the approach to macroeconomics that dominates serious thinking, certainly in our elite universities and in many central banks and other influential policy circles, seems to have absolutely nothing to say about the problem. Not only does it (p. 222) offer no guidance or insight, it really seems to have nothing useful to say. . . . Especially when it comes to matters as important as macroeconomics, a mainstream economist like me insists that every proposition must pass the smell test: does this really make sense? I do not think that the currently popular DSGE models pass the smell test.”

Source:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 24, no. 4 (Fall 2010): 219-26.
(Note: ellipsis in original.)