I vividly remember being in Brazil when Lula (the previous president, and a former leftist) was inaugurated. One of the first things he announced: he would be raising the budget surplus target in the first year of his presidency - I believe from 3.75% to 4.25%. The idea was that the former Marxist president as first action wanted to send a clear message to international capital: We are going to be fiscally conservative.
On a similar note, see Lindsey's recent post, and now note this from today. Note that this is a monetary rather than a fiscal move, but the effect (or at least the intended effect) is very similar.
Thursday, October 30, 2014
Tuesday, October 28, 2014
A spectre is haunting Europe...
The spectre of deflation.
The fear is back.
We will talk about this at some length in class today, because some of the crisis issues we have been talking about recently seem to be playing out in real time. The real worry is deflation in Europe, though other countries (including the U.S.) present concern as well. And it is beginning to re-appear in the popular press, whether it's in Krugman's op-ed yesterday, this week's issue of The Economist, or this morning's top story on CNBC.
Kudos to the first person who can identify in the comments the reference made in the title of this blog post.
The fear is back.
We will talk about this at some length in class today, because some of the crisis issues we have been talking about recently seem to be playing out in real time. The real worry is deflation in Europe, though other countries (including the U.S.) present concern as well. And it is beginning to re-appear in the popular press, whether it's in Krugman's op-ed yesterday, this week's issue of The Economist, or this morning's top story on CNBC.
Kudos to the first person who can identify in the comments the reference made in the title of this blog post.
Thursday, October 23, 2014
Quote from Wolf, for consideration
On banks and financial institutions, consider how the following might have applied to the "too big to fail" financial institutions in the U.S. a few years ago:
"The management of any systemically important bank that has to be rescued by the state should be disbarred, as a matter of course, from further work in the financial industry. A substantial fine should also be levied. Remember the fundamental point. Big banks have consistently operated in the knowledge that their profits are private and losses, if large enough, public. In other words, the institutions they run are underpinned by the state. Managers are, in an important sense, public servants. If they abuse that trust, they should be treated accordingly."
Digest that. Now consider this list. Discuss!
For now, I will say only this: enforcing Wolf's recommendation certainly could open up lots of job opportunities in finance!
(Of course, the more general equilibrium might instead just result in a much-shrunken financial industry... but that's for discussion.)
"The management of any systemically important bank that has to be rescued by the state should be disbarred, as a matter of course, from further work in the financial industry. A substantial fine should also be levied. Remember the fundamental point. Big banks have consistently operated in the knowledge that their profits are private and losses, if large enough, public. In other words, the institutions they run are underpinned by the state. Managers are, in an important sense, public servants. If they abuse that trust, they should be treated accordingly."
Digest that. Now consider this list. Discuss!
For now, I will say only this: enforcing Wolf's recommendation certainly could open up lots of job opportunities in finance!
(Of course, the more general equilibrium might instead just result in a much-shrunken financial industry... but that's for discussion.)
On debt and its "relief". Sort of.
We will talk today about Stiglitz, debt, and defaults. We have talked about Argentina several times. [Insert obligatory "Don't Cry for Argentina" joke here. Or reference to this...]
Being a contrarian, I almost got in a big argument with some recent W&L alums (in finance) at a recent wedding. Then I realized I was at a wedding.
Anyway, the topic of discussion that I didn't discuss at the wedding reception was the latest Argentine default. Sort of an echo of the previous one we talked about in class. Several finance folks were furious about Argentina's legal machinations that amounted to a default on some of its debts (though it has resources to continue to pay other debts, which is what makes it odd). Good luck trying to find anything in the American press (Bloomberg, Forbes, etc.) that takes Argentina's side in this case. You won't find anyone crying for Argentina, as the saying goes. And you shouldn't and I won't. The point here is not to stick up for Argentina. It's rather that I also don't cry for the creditors who are getting stiffed.
The purchasers of Argentina's debt bought it why? Because it yielded more return (higher interest) than the measly amount you get on US investments nowadays. But why the higher return? Because it was riskier. Period. The financial community thought it had legal backing that would secure payment, and it is up in arms that Argentina proved to be an unreliable borrower, using devious legal mechanisms to avoid paying certain lenders. Why does Argentina do this? The point is that Argentina's sovereign financial management for a long time has been - and I apologize for the highly technical terminology: batsh*t crazy.
This craziness came as an infuriating surprise to some. But not to a lot of people who look at history. Buyers of Argentine debt thought they were getting Argentina-debt returns for something closer to U.S.-level risk. Argentina's response was populist and long-run-economically-stupid-but-politically-rational. It is a reminder that when taking risks in finance, sometimes you get what you're paid for.
Economists and their politics (in historical context)
In our discussions, the Great Depression (and the recent "Great Recession") has come up several times. So have the names of a few famous economists. And it may be worthwhile to put some of this in context - both intellectual/theoretical and historical.
We will have talked about four economists (e.g., from class, from things like Tommy Joe's recent posts, and upcoming with Stewart's book choice) and it is worth noting that they emphasize slightly different things. I will oversimplify at the outset, and we will complicate the story further as we go along.
In doing so, late me make a note about historical context. Keynes, Hayek, and Friedman were all deeply preoccupied with one historical moment: the Great Depression. It weighed on their minds, and the question was how to respond to such profound crises. (It is probably not too much of an exaggeration, though I hesitate to mention it, due to the corollaries of Godwin's Law: the Great Depression was THE central problem in 20th Century economic debates, much like the rise of totalitarianism became THE central problem of many debates in political philosophy at the same time: the interwar/Depression through WWII period was so morally/economically/politically catastrophic that it dominated much mid-century thinking across politics, philosophy, and economics.) So how to respond to such a depression?
Let's start with Milton Friedman, actually, even though he comes out of chronological order. Friedman saw inflation and deflation as (almost definitionally) monetary problems, and by extension they had monetary solutions. Inflation? Cut the money supply (or raise interest rates). Deflation? Expand the money supply (or lower interest rates). Let the free market work out the rest in the "real economy" we have discussed. This approach is called "monetarism", and Friedman suggested that the central bank could essentially be replaced with a computer. This minimizes active government intervention by avoiding more government spending, and it defends economic freedom; keep in mind, much of this debate is going on in the context of the Cold War and anti-Communism.
Keynes (who wrote before Friedman) had a different answer: sometimes monetary expansion is not enough (remember Japan's liquidity trap?), and you need the government to step in and stimulate the economy through fiscal means - especially by spending when others won't (call it a "spender of last resort"?), even if that implies borrowing and deficits, though Keynes would also have favored stimulative tax cuts in some circumstances.
Generally speaking, Hayek would have favored neither form of expansion, because the problem is that the booms that come before the busts are created by too much money. Let the real economy work it out with stable prices, even if that means short-term pain.
Krugman would largely follow Keynes (and he considers himself a Keynesian), though his writing has given us a bit more on the importance of monetary policy, whereas the context for Keynes was about instances where fiscal policy was required.
We could add into this mix a few other names that have come up, and figure out where they stand. Where would former Fed chair Ben Bernanke (or current Fed chair Janet Yellen, who has similar views) fit in this? And what about the guy we watched on video the other day: Rick Santelli? Hints: note there is only one of the four economists above that is alive, and that person long praised Bernanke for doing "whatever it takes" from the position of Fed chair to stimulate the economy, while the video link should give you some sense of where Santelli comes down.
There is much more to say on this, and I think talking it through will allow more of the nuance to come out. It will also allow us to get rather more into the contemporary politics of economic policy. Which is always fun.
We will have talked about four economists (e.g., from class, from things like Tommy Joe's recent posts, and upcoming with Stewart's book choice) and it is worth noting that they emphasize slightly different things. I will oversimplify at the outset, and we will complicate the story further as we go along.
In doing so, late me make a note about historical context. Keynes, Hayek, and Friedman were all deeply preoccupied with one historical moment: the Great Depression. It weighed on their minds, and the question was how to respond to such profound crises. (It is probably not too much of an exaggeration, though I hesitate to mention it, due to the corollaries of Godwin's Law: the Great Depression was THE central problem in 20th Century economic debates, much like the rise of totalitarianism became THE central problem of many debates in political philosophy at the same time: the interwar/Depression through WWII period was so morally/economically/politically catastrophic that it dominated much mid-century thinking across politics, philosophy, and economics.) So how to respond to such a depression?
Let's start with Milton Friedman, actually, even though he comes out of chronological order. Friedman saw inflation and deflation as (almost definitionally) monetary problems, and by extension they had monetary solutions. Inflation? Cut the money supply (or raise interest rates). Deflation? Expand the money supply (or lower interest rates). Let the free market work out the rest in the "real economy" we have discussed. This approach is called "monetarism", and Friedman suggested that the central bank could essentially be replaced with a computer. This minimizes active government intervention by avoiding more government spending, and it defends economic freedom; keep in mind, much of this debate is going on in the context of the Cold War and anti-Communism.
Keynes (who wrote before Friedman) had a different answer: sometimes monetary expansion is not enough (remember Japan's liquidity trap?), and you need the government to step in and stimulate the economy through fiscal means - especially by spending when others won't (call it a "spender of last resort"?), even if that implies borrowing and deficits, though Keynes would also have favored stimulative tax cuts in some circumstances.
Generally speaking, Hayek would have favored neither form of expansion, because the problem is that the booms that come before the busts are created by too much money. Let the real economy work it out with stable prices, even if that means short-term pain.
Krugman would largely follow Keynes (and he considers himself a Keynesian), though his writing has given us a bit more on the importance of monetary policy, whereas the context for Keynes was about instances where fiscal policy was required.
Economist
|
Expansionary policy response?
|
|
Keynes
|
Fiscal
|
|
Hayek
|
Neither
|
|
Friedman
|
Monetary
|
|
Krugman
|
Both
|
One short-hand has been to put the Keynesians on the left and Hayek and Friedman on the right. Krugman is a Democrat and Friedman aligned with Republican economics (such as in the Reagan era), and you will find more contemporary liberals favoring Keynes and conservatives favoring Hayek. So if you prefer, herre is another way (which happens to align left and right) of looking at what types of intervention would these four favor when facing a depression or deep recession?
|
|
|
Fiscal expansion?
|
|
|
|
|
Yes
|
No
|
|
Monetary
expansion?
|
Yes
|
Krugman
|
Friedman
|
|
No
|
Keynes*
|
Hayek*
|
|
* - [long asterisked note with necessary caveats:] Again, this is “what they are known for”, not the entirety of what they argued.
Another historical moment worth noting, as I think it informs this debate. The U.S. inflation of the late 1970s was a case that encouraged Friedman to argue for more restrictive monetary and fiscal policy (as happened under Reagan, and to a forgotten extent, under the late Carter presidency). That moment was one that continues to impact the thinking of inflation "hawks", much like the Great Depression haunted earlier generations. (To wrap the debate back around: people like Krugman would say that we are too beholden to anti-inflationary thinking today, much like the Great Depression itself was caused by several countries fearing inflation so much due to their post-WWI experiences that they allowed destructive deflation.)
We could add into this mix a few other names that have come up, and figure out where they stand. Where would former Fed chair Ben Bernanke (or current Fed chair Janet Yellen, who has similar views) fit in this? And what about the guy we watched on video the other day: Rick Santelli? Hints: note there is only one of the four economists above that is alive, and that person long praised Bernanke for doing "whatever it takes" from the position of Fed chair to stimulate the economy, while the video link should give you some sense of where Santelli comes down.
There is much more to say on this, and I think talking it through will allow more of the nuance to come out. It will also allow us to get rather more into the contemporary politics of economic policy. Which is always fun.
Herd behavior and individualism
In honor of blog posts that get at panics, animal spirits, groupthink, and how people tend to engage in herd behavior... thereby producing the conditions for crises.
As context: Monty Python's The Life of Brian is a switched-at-birth comedy about a baby (named Brian) who is placed in the manger next to Baby Jesus. Which leads to some people mistaking Brian for the Messiah. Here is Brian as a grown-up, trying to discourage his adoring followers.
Markets are full of individuals making highly individualuized decisions.
(All together now: "Yes, we ALL make individual decisions.")
Side note on comedic theory: your garden-variety everyday decent comic writers could come up with the central joke here. The genius of Monty Python, if you ask me, is the joke echo, the extra little clever punch line. That is, the last two lines.
As context: Monty Python's The Life of Brian is a switched-at-birth comedy about a baby (named Brian) who is placed in the manger next to Baby Jesus. Which leads to some people mistaking Brian for the Messiah. Here is Brian as a grown-up, trying to discourage his adoring followers.
Markets are full of individuals making highly individualuized decisions.
(All together now: "Yes, we ALL make individual decisions.")
Side note on comedic theory: your garden-variety everyday decent comic writers could come up with the central joke here. The genius of Monty Python, if you ask me, is the joke echo, the extra little clever punch line. That is, the last two lines.
Tuesday, October 21, 2014
Brainstorm/pondering of the day
Especially for those of you interested in Europe, the Euro, and the contemporary crisis. As I was re-reading Bernanke and James last night, I found myself wondering about an analogy between the Great Depression (which obviously is a huge historical memory that hangs over global monetary and fiscal policy) and the Euro crisis.
Take France and the U.S. in the early 1930s gold standard and put them in the position of exporters that don't want to loosen monetary policy, largely because they fear domestic inflation. Take the UK as the country that has an overvalued currency in the system, relative to other countries, and is exhibiting current account deficits (buying more imports and having to deplete its gold reserves).
The idea is that the strong exporter.should allow a bit of inflation to rebalance the system in this fixed exchange rate environment. That's what "playing by the rules" meant.
Now substitute above: "Germany" for "France and the U.S.", "Spain and Portugal" for "UK", and "Euro" for "gold standard"
We can think about how well the analogy works, and limitations on it. Just a thought.
Take France and the U.S. in the early 1930s gold standard and put them in the position of exporters that don't want to loosen monetary policy, largely because they fear domestic inflation. Take the UK as the country that has an overvalued currency in the system, relative to other countries, and is exhibiting current account deficits (buying more imports and having to deplete its gold reserves).
The idea is that the strong exporter.should allow a bit of inflation to rebalance the system in this fixed exchange rate environment. That's what "playing by the rules" meant.
Now substitute above: "Germany" for "France and the U.S.", "Spain and Portugal" for "UK", and "Euro" for "gold standard"
We can think about how well the analogy works, and limitations on it. Just a thought.
On the interest rate(s)
Ben Atnipp makes a good point about interest rates: we talk about them as if there is one, but there are many. It's a good thing to keep in mind.
For the record, when talking about the interest rate that is "set" or "controlled" by the Federal Reserve, we are generally referring to the Fed funds rate, or actually the "Fed funds target rate", which is currently targeted in the range of 0.00% - 0.25%. (The Fed doesn't exactly "control" most interest rates in the economy - it only provides a sort of anchor for them - which begins to address why I asked on the previous handout "How can the central bank “set an interest rate” and still have us talk about being a free market, capitalist economy?")
In his post, Ben mentioned a bunch of other interest rates. One way to think about domestic rates in the U.S. (and many rates around the world) is basically to think of the short-term US Treasury as virtually risk-free debt. That is, loan the money to the US government and you will get your money back. (This is why the idea of breaching the debt ceiling was such a worry - because it would violate the basic principle on which so much of modern global finance is based.) The interest rate on corporate debt will be higher than the interest rate on Treasury bills, precisely because they are riskier. If you are going to loan your money to someone riskier than the US government, you will want to be compensated with a higher return in the form of higher rates. Longer-term US government bonds will generally also pay higher interest (or have higher rates) than short-term, for several reasons that have to do with the risks of inflation and the expected growth of the economy over time. Basically, if you loan the US government money for a few months, don't expect much interest (especially nowadays); if you are willing to loan for longer, you will be able to command a slightly higher return, though still rather modest nowadays.
More on this in class, upon request.
For the record, when talking about the interest rate that is "set" or "controlled" by the Federal Reserve, we are generally referring to the Fed funds rate, or actually the "Fed funds target rate", which is currently targeted in the range of 0.00% - 0.25%. (The Fed doesn't exactly "control" most interest rates in the economy - it only provides a sort of anchor for them - which begins to address why I asked on the previous handout "How can the central bank “set an interest rate” and still have us talk about being a free market, capitalist economy?")
In his post, Ben mentioned a bunch of other interest rates. One way to think about domestic rates in the U.S. (and many rates around the world) is basically to think of the short-term US Treasury as virtually risk-free debt. That is, loan the money to the US government and you will get your money back. (This is why the idea of breaching the debt ceiling was such a worry - because it would violate the basic principle on which so much of modern global finance is based.) The interest rate on corporate debt will be higher than the interest rate on Treasury bills, precisely because they are riskier. If you are going to loan your money to someone riskier than the US government, you will want to be compensated with a higher return in the form of higher rates. Longer-term US government bonds will generally also pay higher interest (or have higher rates) than short-term, for several reasons that have to do with the risks of inflation and the expected growth of the economy over time. Basically, if you loan the US government money for a few months, don't expect much interest (especially nowadays); if you are willing to loan for longer, you will be able to command a slightly higher return, though still rather modest nowadays.
More on this in class, upon request.
Friday, October 17, 2014
Krugman post #1
We are getting close to the point in the course when we will read Paul Krugman's book. Perhaps the time has come to do the first link to one of his New York Times op-eds, which will typically be on point for us. And they are also polemical and partisan enough - often enough - to make them worth arguing about!
Thursday, October 16, 2014
Shock and Aw!
We have read a couple of pieces published by the St. Louis Fed. Its president, James Bullard, has been one of the more centrist-to-hawkish regional presidents. This means that he has been more willing than some Fed regional presidents to "taper", or end the Fed's bond-buying program (which, keep in mind, is designed to keep interest rates very low).
So it came as a surprise to the markets when he wondered aloud if the Fed's bond-buying programs (aka, "quantitative easing") should continue. Why would he say that? Well, a key economic indicator came in lower than expectations. From our discussion the other day, see if you can guess which one (though there a few possible "correct" answers to this).
Once you've made your guess, go here and see the video clip and story.
So it came as a surprise to the markets when he wondered aloud if the Fed's bond-buying programs (aka, "quantitative easing") should continue. Why would he say that? Well, a key economic indicator came in lower than expectations. From our discussion the other day, see if you can guess which one (though there a few possible "correct" answers to this).
Once you've made your guess, go here and see the video clip and story.
Tuesday, October 14, 2014
National security protectionism: Nationalize the hotels!
International trade and protectionism makes for strange bedfellows and unpredictable policy positions. Take this video, for example.
Larry Kudlow is one of the most vocal libertarian, free market advocates on cable news. Barney Frank was one of the most vocal liberal Democrats in Congress. Guess which one wants sanctions on the China as Chinese capital tries to spend nearly $2 billion to buy New York's Waldorf-Astoria Hotel?
Now, to be clear, the issue is not solely capital flows for the person advocating sanctions - it is linked to cybersecurity and punishing China for hacking incidents. Recall the St. Louis Fed piece on the slippery slope of protectionism using "national security" logics? Ask yourself if it is playing out in real time.
[Random W&L reference: the host of the discussion is now-rather-famous (in financial journalism circles) recent grad Kelly Evans, '07.]
Larry Kudlow is one of the most vocal libertarian, free market advocates on cable news. Barney Frank was one of the most vocal liberal Democrats in Congress. Guess which one wants sanctions on the China as Chinese capital tries to spend nearly $2 billion to buy New York's Waldorf-Astoria Hotel?
Now, to be clear, the issue is not solely capital flows for the person advocating sanctions - it is linked to cybersecurity and punishing China for hacking incidents. Recall the St. Louis Fed piece on the slippery slope of protectionism using "national security" logics? Ask yourself if it is playing out in real time.
[Random W&L reference: the host of the discussion is now-rather-famous (in financial journalism circles) recent grad Kelly Evans, '07.]
Monday, October 13, 2014
Compare and contrast
Paul Krugman is an author we will be reading soon enough. He is also a New York Times columnist. Today's column - if you read closely enough - reflects not only a discussion of the Federal Reserve's preoccupations today, but also has echoes of the 1896 presidential election. As The Wizard of Oz could show us.
It can be interesting to compare and contrast the late 1800s - 1930s period with the contemporary Great Recession.
History doesn't repeat itself, but it does rhyme.
It can be interesting to compare and contrast the late 1800s - 1930s period with the contemporary Great Recession.
History doesn't repeat itself, but it does rhyme.
Edge of your seats stuff...
You know you were all waiting.
FWIW, I would say: great call. Influential not only on content, but on some important methodological issues in game theory. My first instinct was, why didn't this guy get to join in the fun, but they have their reasons.
FWIW, I would say: great call. Influential not only on content, but on some important methodological issues in game theory. My first instinct was, why didn't this guy get to join in the fun, but they have their reasons.
Thursday, October 09, 2014
Thirty years on from FDI in the American auto industry
Here's an interesting story on FDI that I went looking for when I thought about "market-seeking". I want to remind you of the "voluntary export restraint" undertaken by Japanese automakers in the early 1980s. Much derided by economists for being a tariff without the revenue.
Fast forward thirty years:
Evidence that pressure on Japanese automakers (i.e., protectionism) worked? Discuss!
Fast forward thirty years:
Evidence that pressure on Japanese automakers (i.e., protectionism) worked? Discuss!
Book List (not exhaustive)
A partial and non-exhaustive list of books on financial and economic crisis that you might choose to read and write about for later in the course [reposted and updated from 2009 & 2012].
Ahamed, Liaquat. Lords of Finance: The Bankers who Broke the World.
Akerlof, George & Robert Shiller. Animal Spirits.
Bagus, Philip. Tragedy of the Euro.
Bernanke, Ben. Essays on the Great Depression.
Blinder, Alan. After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
Cooper, George. The Origin of Financial Crises.
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System
Fox, Justin. The Myth of the Rational Market
Friedman, Milton. The Great Contraction, 1929-1933.
Galbraith, John Kenneth. The Great Crash of 1929.
Gorton, Gary. Misunderstanding Financial Crises: Why We Don't See Them Coming
Irwin, Neil. The Alchemists: Three Central Bankers and the World on Fire
James, Harold. The Creation and Destruction of Value: The Globalization Cycle
James, Harold. The End of Globalization: Lessons from the Great Depression
Keynes, John Maynard. The General Theory of Employment, Interest, and Money
Kindleberger, Charles. Manias, Panics, and Crashes: A History of Financial Crises.
Kindleberger, Charles. The World in Depression, 1929-1939
Lewis, Michael. Flash Boys
Lewis, Michael. Panic: The Story of Modern Financial Insanity
Lynn, Matthew. Bust: Greece, The Euro, and the Sovereign Debt Crisis
Marsh, David. The Euro: The Battle for the New Global Currency
Minsky, Hyman. Can 'It' Happen Again? Essays on Instability and Finance
Minsky, Hyman. Stabilizing an Unstable Economy
Morris, Charles. The Two Trillion Dollar Meltdown
Onaran, Yalman. Zombie Banks: How Broken Banks and Debtor Nations are Crippling the Global Economy
Piketty, Thomas. Capital in the Twenty-First Century
Reinhart, Carmen and Kenneth Rogoff. This Time is Different: Eight Centuries of Financial Folly
Shiller, Robert. The Subprime Solution
Sorkin, Andrew Ross. Too Big to Fail
Stiglitz, Joseph. The Price of Inequality
van Overtveldt, Johan. The End of the Euro: The Uneasy Future of the European Union
Wapshot, Nicholas. Keynes Hayek: The Clash that Defined Modern Economics
Wessel, David. In Fed We Trust: Ben Bernanke's War on the Great Panic
Wolf, Martin. Fixing Global Finance
Wolf, Martin. The Shifts and the Shocks
Zandi, Mark. Financial Shock
Ahamed, Liaquat. Lords of Finance: The Bankers who Broke the World.
Akerlof, George & Robert Shiller. Animal Spirits.
Bagus, Philip. Tragedy of the Euro.
Bernanke, Ben. Essays on the Great Depression.
Blinder, Alan. After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
Cooper, George. The Origin of Financial Crises.
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System
Fox, Justin. The Myth of the Rational Market
Friedman, Milton. The Great Contraction, 1929-1933.
Galbraith, John Kenneth. The Great Crash of 1929.
Gorton, Gary. Misunderstanding Financial Crises: Why We Don't See Them Coming
Irwin, Neil. The Alchemists: Three Central Bankers and the World on Fire
James, Harold. The Creation and Destruction of Value: The Globalization Cycle
James, Harold. The End of Globalization: Lessons from the Great Depression
Keynes, John Maynard. The General Theory of Employment, Interest, and Money
Kindleberger, Charles. Manias, Panics, and Crashes: A History of Financial Crises.
Kindleberger, Charles. The World in Depression, 1929-1939
Lewis, Michael. Flash Boys
Lynn, Matthew. Bust: Greece, The Euro, and the Sovereign Debt Crisis
Marsh, David. The Euro: The Battle for the New Global Currency
Minsky, Hyman. Can 'It' Happen Again? Essays on Instability and Finance
Minsky, Hyman. Stabilizing an Unstable Economy
Morris, Charles. The Two Trillion Dollar Meltdown
Onaran, Yalman. Zombie Banks: How Broken Banks and Debtor Nations are Crippling the Global Economy
Piketty, Thomas. Capital in the Twenty-First Century
Reinhart, Carmen and Kenneth Rogoff. This Time is Different: Eight Centuries of Financial Folly
Shiller, Robert. The Subprime Solution
Sorkin, Andrew Ross. Too Big to Fail
Stiglitz, Joseph. The Price of Inequality
van Overtveldt, Johan. The End of the Euro: The Uneasy Future of the European Union
Wapshot, Nicholas. Keynes Hayek: The Clash that Defined Modern Economics
Wessel, David. In Fed We Trust: Ben Bernanke's War on the Great Panic
Wolf, Martin. Fixing Global Finance
Wolf, Martin. The Shifts and the Shocks
Tuesday, October 07, 2014
Chernobyl and that other one
Rereading Stiglitz reminded me: The Chernobyl disaster of 1985 and its aftermath was seen as a damning indictment of the communist system. Rightly so, I might add.
So an explosion and aftermath with even worse consequences in a capitalist system should be seen as a damning indictment too... of something? Or not?
So an explosion and aftermath with even worse consequences in a capitalist system should be seen as a damning indictment too... of something? Or not?
Special Report in The Economist
This week's issue of The Economist has a great special report on the challenges facing labor (or, rather, labour) in the current global economy.
It is the sort of analysis for which I admire the magazine: it is even-handed in terms of looking at evidence rather comprehensively, regardless of the fact that the publication itself has a clear editorial position of being pro-trade and pro-market. (Note that this is not the same as being pro-corporation or anti-labor.) The Economist dismisses a lot of nonsensical arguments, but takes seriously any challenges to their own world view.
The special report has several linked articles, and much of it is behind a subscription wall. If you would like to access it, you can do so through Leyburn. I won't distribute copies for copyright reasons, but you can borrow my copy of the magazine if you want a look.
It is the sort of analysis for which I admire the magazine: it is even-handed in terms of looking at evidence rather comprehensively, regardless of the fact that the publication itself has a clear editorial position of being pro-trade and pro-market. (Note that this is not the same as being pro-corporation or anti-labor.) The Economist dismisses a lot of nonsensical arguments, but takes seriously any challenges to their own world view.
The special report has several linked articles, and much of it is behind a subscription wall. If you would like to access it, you can do so through Leyburn. I won't distribute copies for copyright reasons, but you can borrow my copy of the magazine if you want a look.
Globalization and inequality (between and within countries)
An interesting review in The Economist about changes in global inequality over time. Complete with some discussion of big moments of globalization and reversal at the end.
Friday, October 03, 2014
It's not all trade
As seen also on outlets ranging from pro-business CNBC to left-leaning Huffington Post: the Robocalypse!
See also... uh, this.
See also... uh, this.
Thursday, October 02, 2014
Barriers to Trade and Borders
We should probably do a study of whether trade is hindered by natural barriers such as linguistic boundaries like these.
Just FYI, Prof. Anderson could help us with measuring how various forms of "distance", which could probably be linguistic as well as geographic affect the degree of trade (as measured by price dispersion between places). Have a look if you are inspired.
Just FYI, Prof. Anderson could help us with measuring how various forms of "distance", which could probably be linguistic as well as geographic affect the degree of trade (as measured by price dispersion between places). Have a look if you are inspired.
Trade and Factors of Production, the sequel
As we have discussed a few times in class, one of the main running themes (of this first part of understanding IPE) is the linkage between trade and factors of production. In particular, how patterns of trade are affected by the relative abundance of factors of production.
The point of departure was comparative advantage. Opening trade tends to lead labor-rich countries to produce labor-intensive goods and capital-rich countries to produce capital-intensive goods. That is, you tend to produce in things that make use of your most abundant factors of production. (This is known in economics as the Heckscher-Ohlin theorem.) As an example to support your intuition, think of China and the U.S. trading. The expectation would be that China will produce goods that make use of lots of labor, because China has lots of labor and by extension, labor in China is rather cheap compared to the U.S. (At least low- to moderately-skilled labor. The story is less clear when we get to high-skilled labor. Of course, even the definition of what "high-skilled" means will be changing over time, and so on. But in general, think of China producing non-high-tech goods in big factories, using lots of labor to do so.)
We can summarize another main conversation item thus far in the same terms: objections to free trade in industrialized countries like the U.S. tend to focus on trade's impact on the factor of production that is relatively scarce in rich countries: low- to moderately-skilled labor. Those are the people likeliest to be hurt by trade. All your economists' theories and studies of aggregate gains and consumer surplus and comparative advantage and long-run equilibrium sound a bit ivory-towerish to someone who lost their job. Especially those for whom, as Stiglitz worried, adequate protection or social support never really happened. (Considering labor and capital as the two main factors of production, there is a profound moral and philosophical question about whether we should be concerned primarily about opportunities for laborers and consumers - because workers are human and capital is not - or also about opportunities for non-human capital, which ultimately is the basis for human wealth, but I will not address that at length here.)
So in a sense, our conversation has very much been about trade and factors of production. Think about how Ronald Rogowski.builds on this. He makes reference to the Stolper-Samuelson theorem, which builds upon our discussion of factor price equalization and extends the logic above:
* When trade increases, returns to a country's abundant factor of production increase.
Ex.: Trade increases, wages for Chinese workers increase
Ex.: Trade increases, returns to American capital increase
* By the same logic, decreasing trade (or protectionism of various kinds) advantages the scarce factor of production.
Ex.: American laborers seek protection from goods made by Chinese laborers
Ex.: Chinese capital might want not to compete with American capital (in several ways we can discuss)
The issue for Rogowski is not only the trade theory dynamics, but the political effects or consequences of these dynamics. Notice that he considers three factors of production: labor, capital, and land. Pay attention to his evidence. Look at what he claims to be able to explain historically, using little more than the trade theory we have discussed thus far.
The point of departure was comparative advantage. Opening trade tends to lead labor-rich countries to produce labor-intensive goods and capital-rich countries to produce capital-intensive goods. That is, you tend to produce in things that make use of your most abundant factors of production. (This is known in economics as the Heckscher-Ohlin theorem.) As an example to support your intuition, think of China and the U.S. trading. The expectation would be that China will produce goods that make use of lots of labor, because China has lots of labor and by extension, labor in China is rather cheap compared to the U.S. (At least low- to moderately-skilled labor. The story is less clear when we get to high-skilled labor. Of course, even the definition of what "high-skilled" means will be changing over time, and so on. But in general, think of China producing non-high-tech goods in big factories, using lots of labor to do so.)
We can summarize another main conversation item thus far in the same terms: objections to free trade in industrialized countries like the U.S. tend to focus on trade's impact on the factor of production that is relatively scarce in rich countries: low- to moderately-skilled labor. Those are the people likeliest to be hurt by trade. All your economists' theories and studies of aggregate gains and consumer surplus and comparative advantage and long-run equilibrium sound a bit ivory-towerish to someone who lost their job. Especially those for whom, as Stiglitz worried, adequate protection or social support never really happened. (Considering labor and capital as the two main factors of production, there is a profound moral and philosophical question about whether we should be concerned primarily about opportunities for laborers and consumers - because workers are human and capital is not - or also about opportunities for non-human capital, which ultimately is the basis for human wealth, but I will not address that at length here.)
So in a sense, our conversation has very much been about trade and factors of production. Think about how Ronald Rogowski.builds on this. He makes reference to the Stolper-Samuelson theorem, which builds upon our discussion of factor price equalization and extends the logic above:
* When trade increases, returns to a country's abundant factor of production increase.
Ex.: Trade increases, wages for Chinese workers increase
Ex.: Trade increases, returns to American capital increase
* By the same logic, decreasing trade (or protectionism of various kinds) advantages the scarce factor of production.
Ex.: American laborers seek protection from goods made by Chinese laborers
Ex.: Chinese capital might want not to compete with American capital (in several ways we can discuss)
The issue for Rogowski is not only the trade theory dynamics, but the political effects or consequences of these dynamics. Notice that he considers three factors of production: labor, capital, and land. Pay attention to his evidence. Look at what he claims to be able to explain historically, using little more than the trade theory we have discussed thus far.
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