Economists have it easy (I assume... or so my model tells me)

This quote, by a prominent (albeit rather heterodox) development economist, also has a shorter rendering that makes sense in light of Ben Atnipp's post: "an economic transaction is a solved political problem".

Resolutions for the WTO

Per liberi comercii, libertas

Lexington Virginia USA

December 2014

Be it resolved in this plenary session of the Whirled Trade Organization (heretofore WTO) convened in Lexington, Virginia, USA, that:

I>        Agricultural products and automobiles, and all materials involved in the production of agriculture or automobiles, shall be traded freely, without prejudice to country of origin. 

II>       No member nation of the WTO shall impose non-tariff barriers (NTBs) to trade on products in the areas of agriculture, automobile production, or finance. 

III>      NTBs in the areas of agriculture that are prohibited include, but are not limited to, restrictions on genetically-modified organisms (GMOs) and any other production processes that are not demonstrated to be unsafe for human consumption.

           

IV>       In the interest of free trade and competition, no member nation shall provide direct subsidies or financial support to the agricultural, automobile, or financial industries.  

V>       No member nation of the WTO shall place restrictions on capital investment flows into or out of their country. 

VI>     All member nations of the WTO shall allow currency exchange rates to be determined by market mechanisms.

           

VII>    All member nations hereby commit themselves to furthering the goals of universal free trade in all goods and services by the year 2020.

Collective action problem

Question of the day: Can I be bothered?

Today's illustration of the Tragedy of the Commons

Remember this guy? (Colbert does.)

Posted without comment

Ha!

Vermonters just don't buy it when Virginians claim...

U.S.-China climate deal (!?)

Big news (maybe) yesterday about a potential U.S.-China climate deal. Interesting to see how what was seen as an irreconcilable difference has suddenly been turned on its head (somewhat). So why the (doubt-laden) parentheticals?

Well, not everyone thinks the deal is worth the recycled paper it's printed on. And they have something to say about it.  

Implications of Low Inflation for Monetary Policy (Eric Rosengren, Pres., Boston Fed)

Here is a link to the speech and the materials from yesterday's lecture.

Bailouts, crises, and ... DUDE.

This one is for those of you who find yourself getting too sympathetic with the overextended borrowers of the world.

Republican Majority and Official Obama Lame Duck Period

What do you think? Open thread here.

Feel free to post in comments

Krugman apologizes and admits he was wrong!*

* - sort of.

He says he's mostly right, but was once (sort of half-)wrong a while ago in ways that prove he's even more right now.

Brazil and the markets

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.

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.

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.)

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.

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. Keynes was primarily known for advocating for expansionary fiscal policy (especially government spending) when monetary policy fails, but was not averse to expansionary monetary policy. Almost no daylight between him and Krugman on this; the distinction here is simply that Krugman has spoken more in our readings about the need for monetary policy, whereas the context for Keynes was much more about the need for fiscal stimulus. Also, do not take Hayek for being solely a libertarian that wants laissez-faire; he occasionally offered somewhat more nuance in his understanding of government involvement than that. Similarly, do not take Friedman (or anyone else, for that matter) to be simply in favor of expanding the money supply in all circumstances. Far from it - it is only in circumstances like depressions and deep recessions that the monetary "computer" would print more money. 

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.

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.

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. 

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!