Economics and Politics - Paul Krugman Blog - NYTimes.com

Economics and Politics - Paul Krugman Blog - NYTimes.com:

For something I’m working on: we know that China is pursuing a mercantilist policy: keeping the renminbi weak through a combination of capital controls and intervention, leading to trade surpluses and capital exports in a country that might well be a natural capital importer. We also know, or should know, that this amounts to a beggar-thy-neighbor policy — or, more accurately, a beggar-everyone but yourself policy — when the world’s major economies are in a liquidity trap.

But how big is the impact? Here’s a quick back-of-the-envelope assessment.

Start with the Chinese surplus. It has been temporarily depressed by the world trade collapse, but seems to be on the rise again. Blanchard and Milesi-Ferretti, at the IMF but speaking for themselves, project a Chinese current account surplus for 2010-2014 of 0.9 percent of gross world product.

You can think of this as a negative shock to rest-of-world net exports. (Technically, that’s not quite correct — because the shock depresses res-of-world GDP and hence rest-of-world imports from China, the realized trade surplus is smaller than the shock. But that’s a small correction.)

In turn, this negative shock is like a negative shock to government purchases of goods and services. So it should have a similar multiplier. Multiplier estimates are all over the place, but tend to cluster around 1.5. So we’re looking at a negative impact on gross world product of around 1.4 percent. Not huge — China isn’t the principal obstacle to recovery — but significant.

And, if we think of the United States as bearing a proportionate share, and also use the rule of thumb that one point of GDP = 1 million jobs, we’re looking at 1.4 million U.S. jobs lost due to Chinese mercantilism.

What is it with Microeconomists?

Worthwhile Canadian Initiative:

What is it with Microeconomists?

They are certainly not stupid. And they are certainly not ignorant either. I know that the ones I'm complaining about are smarter than me, and more knowledgeable than me. And that includes economics smarts and knowledge. Some of them make me feel totally inadequate on a daily basis (I read their blogs daily). Some of my best friends are microeconomists. But they just don't get macro!

I'm talking about money wages and employment. I can't be bothered to link to the posts I'm complaining about. And I can't be bothered to go through those posts and explain why their reasoning is wrong. Others have done this, and have failed. Or at least, have failed to make any impression on the 'microeconomic miscreants'. They seem to be preaching to the choir; and the choir is composed of macroeconomists.

I want to try a different tack. I'm not going to try to show that they are wrong. I want to try to understand why they keep going wrong.

But I'm not altogether sure why they keep going wrong. I have three theories, and am going to run through each in turn. Actually, I think we probably need all three theories to explain why microeconomists are just so confused about macro. ...

If all apples were identical, there would be no need for trade. Each worker would eat his own apples. No worker could be unemployed; he could just grow as many apples as he wanted to eat, and eat his own apples.

Even if apples came in different varieties, or there were a tabu against workers eating their own apples, if barter were easy there could never be unemployment. The unemployed workers could all just get together and swap all the apples they wanted to produce and sell. In barter, a supply of apples is a demand for apples.

It is monetary exchange (or rather, the high transactions costs of barter that make monetary exchange essential) that is the root of all deficiencies in aggregate demand. Each worker's apples are sold in his own private market. And they are sold for money, the medium of exchange. To demand apples is to supply money in exchange. And if people want to hang onto their money, rather than buy apples with it, the demand for apples, and the demand for labour, will be deficient.

A deficiency of aggregate demand has got nothing whatsoever to do with a deficiency of income. Income is always sufficient. It's always the same as goods sold. A deficiency of aggregate demand is a deficiency of peoples' willingness to get rid of money. The 'Paradox of Thrift', and the 'Paradox of Toil', are merely corrupt versions of, or way-stations to, the Paradox of Money. Each individual can increase his stock of money by buying less; but in aggregate they fail, but cause unemployment as a side-effect."

FT.com / Comment / Opinion - Bankers had cashed in before the music stopped

FT.com / Comment / Opinion - Bankers had cashed in before the music stopped: "According to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives. Many – in the media, academia and the financial sector – have used this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. That standard narrative, however, turns out to be incorrect.

It is true that the top executives at both banks suffered significant losses on shares they held when their companies collapsed. But our analysis, using data from Securities and Exchange Commission filings, shows the banks’ top five executives had cashed out such large amounts since the beginning of this decade that, even after the losses, their net pay-offs during this period were substantially positive.

In 2000-07, the top five executives at Bear and Lehman pocketed cash bonuses exceeding $300m and $150m respectively (adjusted to 2009 dollars). Although the financial results on which bonus payments were based were sharply reversed in 2008, pay arrangements allowed executives to keep past bonuses.

Furthermore, executives regularly took large amounts of money off the table by unloading shares and options. Overall, in 2000-08 the top-five teams at Bear and Lehman cashed out close to $2bn in this way"

Unhelpful Hansen - Paul Krugman Blog - NYTimes.com

Unhelpful Hansen - Paul Krugman Blog - NYTimes.com: "James Hansen is a great climate scientist. He was the first to warn about the climate crisis; I take what he says about coal, in particular, very seriously.

Unfortunately, while I defer to him on all matters climate, today’s op-ed article suggests that he really hasn’t made any effort to understand the economics of emissions control. And that’s not a small matter, because he’s now engaged in a misguided crusade against cap and trade, which is — let’s face it — the only form of action against greenhouse gas emissions we have any chance of taking before catastrophe becomes inevitable.

What the basic economic analysis says is that an emissions tax of the form Hansen wants and a system of tradable emission permits, aka cap and trade, are essentially equivalent in their effects. The picture looks like this:

A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems.

This is true even if some emitters are “grandfathered” with free allocations of permits, as will surely be the case. They still have an incentive to cut their emissions, so that they can sell their excess permits to others.

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story.

And as far as I can see, the question about uncertainty is secondary; the fact is that cap and trade works. Hansen admits that the sulfur dioxide cap has reduced pollution, but argues that it didn’t do enough; well, it did as much as it was designed to do. If Hansen thinks it should have done more, he should be campaigning for a lower cap, not trashing the whole program.

Oh, and the argument that if you create a market, you’re opening the door for Wall Street evildoers, is bizarre. Emissions permits aren’t subprime mortgages, let alone complex derivatives based on subprime; they’re straightforward rights to do a specific thing. It will truly be a tragedy if people generalize from the financial crisis to block crucially needed environmental policy.

Things like this often happen when economists deal with physical scientists; the hard-science guys tend to assume that we’re witch doctors with nothing to tell them, so they can’t be bothered to listen at all to what the economists have to say, and the result is that they end up reinventing old errors in the belief that they’re deep insights. Most of the time not much harm is done. But this time is different.

For here’s the way it is: we have a real chance of getting a serious cap and trade program in place within a year or two. We have no chance of getting a carbon tax for the foreseeable future. It’s just destructive to denounce the program we can actually get — a program that won’t be perfect, won’t be enough, but can be made increasingly effective over time — in favor of something that can’t possibly happen in time to avoid disaster.

"

Matthew Yglesias » Manmohan Singh

Matthew Yglesias » Manmohan Singh: "it’s always difficult to really keep the sheer scale of India and China in mind. Thinking about the global economic crisis, for example, it’s worth recalling that those two mega-countries have kept on growing right through the developed world’s downturn. So for over two billion people, 2009 is actually the best of times, economically speaking. And that’s many more people than live in the US/Europe/Japan depressed era"

The Wrong Jobs Summit - J. Bradford DeLong's Grasping Reality with All Eight Tentacles

The Wrong Jobs Summit - J. Bradford DeLong's Grasping Reality with All Eight Tentacles: "Ever since the 1930s and John Hicks--if not before--economists trying to analyze the determinants of spending have focused on two of the economy’s markets: the market for liquidity and the market for savings.

Irving Fisher first analyzed the market for liquidity—the money market—which matches the supply of readily spendable purchasing power in the economy (cash, checking account balances, credit lines) with the demand of households and businesses to hold some of their wealth in the form of readily spendable purchasing power. Supply and demand in this market is influenced by interest rates and the flow of spending.

Knut Wicksell first analyzed the market for savings—usually called “the bond market”—which matches households wishing to boost the value of their savings with businesses seeking capital to expand their productive capacity. Interest rates are crucial here, as well.

At first glance, it seems there are three variables at play: spending, income, and interest rates. But when we recognize that everyone’s spending is someone else’s income, we see that there are really only two variables—that the economy will settle at that level of interest rates, spending, and income where supply equals demand in the market for liquidity and in the market for savings.

We now have a framework for managing the economy. For the government to boost jobs, it must to do something to change the balance of supply and demand in either the market for liquidity or the market for savings. In general, the central bank—the Federal Reserve—acts to tweak supply and demand in the market for liquidity. The president and Congress act to tweak supply and demand in the market for savings. But they must make sure that whatever spending, income, and job-stimulating effect they create by intervening in one market is not undone by changes in the other market.

Right now, if you ask the decisive members of congress—by which I mean the Blue Dog Democrats in the House, or the most conservative Democrats and most liberal Republicans in the Senate —why the president and the Congress are not doing more to reduce unemployment and boost spending and income, the answer you’ll get is ... well, you probably wouldn't get an intelligible answer.

But if you did get an explanation for the lack of congressional action it would go something like this: Attempts to move supply and demand in the market for savings in order to boost spending would (a) increase the national debt burden on future taxpayers and (b) lead to a large decline in bond prices and a boost in interest rates. Why? Because businesses would try to increase their liquidity to support higher spending, driving up interest rates, which, in turn, would cause businesses to cut back on investment, thus neutralizing most or all of the stimulative policies.

Similarly, if you were to ask the Federal Reserve why it isn’t doing more to reduce unemployment and boost spending and income, the answer you would get is this: Spending is in no way constrained by a shortage of liquidity. We have already done all we can do, indeed we have “flooded the zone” with liquidity. As a result, the Fed is disinclined to pursue additional tweaks of supply and demand in the market for liquidity because it fears such efforts would fuel destructive inflation in the future without boosting employment and spending in the present.

Both of these arguments are comprehensible; each might well be true. But they cannot both be true at the same time. Either the economy is so awash in liquidity that the Federal Reserve cannot do much to boost spending—in which case additional spending by the government won’t generate any substantial rise in interest rates. Or additional government spending will crowd out investment as businesses scramble for liquidity and interest rates rise—in which case the economy is not awash in liquidity, and quantitative easing by the Federal Reserve could do a lot right now to boost spending and employment.

It appears that what we have here is a failure to communicate.

In truth, that is nothing new on this front. It was clear, for example, by Feb. 17 of this year, the day Obama signed the stimulus package, that the economy was in much worse shape than earlier projections had supposed. The administration’s policies were targeted at an economy in which the current—December 2009—unemployment rate was projected at 7.8 percent, with a decline to 6.9 percent projected by December 2010.

But we do not live in that world. We live in a world in which the unemployment rate this month is likely, in the final data, to come in at 10.4 percent, and in which the unemployment rate in December 2010 may well exceed 9.6 percent."