Ann Pettifore's recent article linked to Richard Portes' statement about heterodox economics.
http://www.guardian.co.uk/commentisfree/2009/feb/26/recession-economy-capitalism
Portes, Richard. 2008. "The Annual Report of the Secretary-General (of the Royal Economic Society).
http://www.res.org.uk/society/pdfs/newsletter/apr08.pdf
"Mediocrity is rationalised on the grounds that it is hard for the ‘heterodox’ to publish in top journals -- despite the examples of Joseph Stiglitz, Amartya Sen, Herbert Simon, Samuel Bowles, Herbert Gintis, and many others."
Consider his list of Heterodox economists. Herbert Simon? There is some overlap there, but he ceased to do economics and moved on to other fields. Joe Stiglitz did good stuff before he became active in public debates, but I think most economists would regard his more policy-oriented work as belonging in top journals. Amartya Sen also does interesting work, but has he ever been associated with the left.
Sunday, March 1, 2009
Saturday, February 28, 2009
Furloughing in the Wind
by the Sandwichman
Sandwichpal, John de Graaf is quoted in this New York Times feature about "A Slowdown That May Slow Us Down." "It ['furloughs'] may not ultimately be a sacrifice," John told the Times. "It may be exactly what they need to do to be happier and healthier."
The article also cites shorter work time mavens, Juliet Schor and Ben Hunnicutt and cite Dean Baker's tax credit for time off proposal.
Sandwichpal, John de Graaf is quoted in this New York Times feature about "A Slowdown That May Slow Us Down." "It ['furloughs'] may not ultimately be a sacrifice," John told the Times. "It may be exactly what they need to do to be happier and healthier."
The article also cites shorter work time mavens, Juliet Schor and Ben Hunnicutt and cite Dean Baker's tax credit for time off proposal.
Christina Romer: Following in the Tobin Tradition
Like the late James Tobin, Christina Romer argues for the efficacy of fiscal policy to pull us out of a recession. But that is not the motivation for my title – rather it is something Paul Krugman noted about Dr. Tobin:
Let’s focus on the following from Dr. Romer’s paper:
She was referring to this:
Romer could taken the approach that Brad DeLong took to this line:
To be fair, Greg Mankiw did update his post with the following:
And most economists draw up counterfactual policy simulation as Dr. Romer so politely points out. As Brad earlier noted, Greg Mankiw has unfairly gone after Christina Romer before:
Had she gave an elbow to Mankiw’s rib in reply, she would have been well justified. But hers was a very polite and professional reply. Let’s return to what Paul Krugman said back in 2002:
Bad ideas with powerful political backing may still be leading to some rather sharp elbows being thrown – but it would seem Christina Romer represents a return to fundamental decency.
He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing of an era, one in which economic debate was both nicer and a lot more honest than it is today.
Let’s focus on the following from Dr. Romer’s paper:
The first issue is what it would mean for the policy to work. The President gave a very concrete metric: he wanted a program that would raise employment relative to what it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric meaningless: they complain that because we never observe the outcome under the no stimulus baseline, it isn’t verifiable. But it is, in fact, the intellectually sound and appropriate metric to use. Exactly what any macroeconomist would ask of a policy is what are its effects, holding constant all the other forces affecting the economy. I feel the strongest evidence that the President’s metric is a good one is that it has focused the debate on the right issue. Numerous forecasters, from Mark Zandi to Macroeconomic Advisers to CBO to the Federal Reserve, have looked at what they expect the Act to do. Rather than fighting over the differences in the no-stimulus baselines, which are substantial and largely outside the control of policymakers, the debate has centered on what the policy would accomplish. Of course, one can also debate the baseline and the question of whether creating or saving 3 to 4 million jobs will be enough to fully heal the economy. But, it is important to acknowledge that creating or saving that many jobs would be a tremendous accomplishment.
She was referring to this:
The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.
Romer could taken the approach that Brad DeLong took to this line:
Greg, Greg, Greg, Greg, Greg, Greg. Setting fire to your own credibility to please your political masters is a very myopic intellectual strategy. It is doubleplusungood to say: "It's bad when a Democratic president and his economic advisors do it, but it was just wonderful peachy when a Republican president and I did it."
To be fair, Greg Mankiw did update his post with the following:
A regular reader of this blog (who deserves anonymity) misinterpreted my meaning, so let me clarify: The 4 million job number is a counterfactual policy simulation of what the stimulus will do based on a particular model of the economy. As such, I have no objection to someone citing it in a policy discussion. In fact, macroeconomists use models to generate figures like this all the time. I have even done it myself.
And most economists draw up counterfactual policy simulation as Dr. Romer so politely points out. As Brad earlier noted, Greg Mankiw has unfairly gone after Christina Romer before:
Is there any way to interpret Greg Mankiw's Sunday New Yotk Times other than as an elbow to Chtistie's ribs while he thinks the ref's eye is elsewhere? Christie certainly does not believe that tax multipliers are twice the size of spending multipliers.
Had she gave an elbow to Mankiw’s rib in reply, she would have been well justified. But hers was a very polite and professional reply. Let’s return to what Paul Krugman said back in 2002:
Why do I feel that Mr. Tobin's passing marks the end of an era? Consider that Kennedy Council of Economic Advisers, the most remarkable collection of economic talent to serve the U.S. government since Alexander Hamilton pondered alone. Mr. Tobin, incredibly, was only one of three future Nobelists then working at the council. Would such a group be possible today? I doubt it. When Mr. Tobin went to Washington, top economists weren't subject to strict political litmus tests -- and it would never have occurred to them that the job description included saying things that were manifestly untrue. Need I say more? Yesterday I spoke with William Brainard, another Yale professor who worked with Mr. Tobin, who remarked on his colleague's ''faith in the power of ideas.'' That's a faith that grows ever harder to maintain, as bad ideas with powerful political backing dominate our discourse. So I miss James Tobin, and I mourn not just his passing, but the passing of an era when economists of such fundamental decency could flourish, and even influence policy.
Bad ideas with powerful political backing may still be leading to some rather sharp elbows being thrown – but it would seem Christina Romer represents a return to fundamental decency.
Crowding-out for Spending Increases but Not Tax Cuts?
Lori Montgomery plays Steno Sue for the GOP:
Dean Baker objects to this nonsense:
OK – this is the standard Keynesian view but we are seeing a parade of folks on display at this blog who would tell you: (1) the multiplier for tax cuts is indeed high; and (2) increases in government spending completely crowd-out investment even during periods of unemployment. After all, the Treasury View is what must be taught to their graduate students. Of course, all real economists know the Treasury View does not hold when fiscal stimulus comes in the form of tax cuts for the rich – right?
Republicans quickly attacked the document as a recipe for economic disaster, saying it would raise taxes on businesses and consumers in the middle of a recession in order to bankroll a massive government expansion. "The era of big government is back, and Democrats are asking you to pay for it," said House Minority Leader John A. Boehner (R-Ohio). "The administration's plan, I think, is a job killer, plain and simple." White House budget director Peter Orszag rejected that analysis, saying none of the tax increases would take effect until 2011. But some economists worry that even in 2011 the economy may be too fragile to absorb a tax increase. Meanwhile, some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap.
Dean Baker objects to this nonsense:
While no economists are identified with the view that President Obama's tax increases on the wealthy in 2011 will harm a fragile economy, the article does not discuss at all the economic impact of the cuts in spending that "some Democrats" and Republicans apparently favor. The multiplier for almost possible spending cuts would be considerably larger than the multiplier for the tax increases on the wealthy. Any economists who were concerned that tax increases in 2011 could harm a still weak economy would almost certainly be much more concerned about the prospect of spending cuts in that year.
OK – this is the standard Keynesian view but we are seeing a parade of folks on display at this blog who would tell you: (1) the multiplier for tax cuts is indeed high; and (2) increases in government spending completely crowd-out investment even during periods of unemployment. After all, the Treasury View is what must be taught to their graduate students. Of course, all real economists know the Treasury View does not hold when fiscal stimulus comes in the form of tax cuts for the rich – right?
Friday, February 27, 2009
Not Part of the Remit? Part II
by the Sandwichman
The Sandwichman submitted the following comments to the "Middle Class Task Force" (formerly the White House Task Force on Working Families):
The Middle Class Task Force staff report on Green Jobs, issued today, cites the UN Environmental Programme's report, "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World." I would like to call your attention to two brief but absolutely crucial sections in the UNEP report: "Rethinking Consumption" and "A New Approach to Work Hours".
In the section on rethinking consumption, the authors state, "Sooner rather than later… we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels."
What this means, to be perfectly clear, is that if we DON'T confront the economic growth imperative all the rest of the good work we do to create green jobs will be moot.
That's a rather strong statement, tucked in inconspicuously in a one-page section of a 376-page document and, significantly, excluded from the summary report "for decision makers."
We know why this matter wasn't discussed more fully because the report tells us. The question about what to do about excessive consumption was "not part of the remit of this report." Let me repeat, it was "not part of the remit of this report" to look into a matter that could overwhelm (that is to say: bury, crush, submerge completely) all of the sophisticated methodological and technological innovations discussed in the other 375 pages of the report.
May I point out that is like getting ready to do a twelve-hour brain surgery without making sure there are double and triple back-ups in case of a power outage? As John Kenneth Galbraith remarked fifty years ago, it is like having a discussion about how to prevent traffic accidents while agreeing not to talk about speed.
There's a name for this bizarre phenomenon of skirting around the forbidden question. It's called "the elephant in the room." The White House blog mentioned the good-natured jockeying among cities and states for who was "greenest." By coincidence, earlier this week the City of Vancouver launched a program with the goal of making Vancouver "the greenest city in the world." In response to that, I started a facebook group called "The Greenest Elephant in the Room" because so much of the talk about green jobs sidesteps the single most direct and immediate way to cut greenhouse gas emissions (among other things) – reduce consumption, reduce the hours of work, share the work and spare the planet!
That brings me to the other brief section in the UNEP report, "A New Approach to Work Hours":
Industrial economies are extraordinarily productive-meaning that the same quantity of output can be produced with less and less human work. In principle, this can translate into either of two objectives: raising wages (in line with productivity) while holding working hours constant, or providing greater leisure time while holding income from wages constant. In practice, it has mostly been the former. Most people have been locked into a "work-and-spend" pattern.
It takes courage to talk about what has become taboo to mention – to name the elephant in the room. The brief sections in the UNEP report that discuss "rethinking consumption" and "a new approach to work hours" are pithy. Their brevity, though, and lack of follow-through speaks volumes.
The Sandwichman submitted the following comments to the "Middle Class Task Force" (formerly the White House Task Force on Working Families):
The Middle Class Task Force staff report on Green Jobs, issued today, cites the UN Environmental Programme's report, "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World." I would like to call your attention to two brief but absolutely crucial sections in the UNEP report: "Rethinking Consumption" and "A New Approach to Work Hours".
In the section on rethinking consumption, the authors state, "Sooner rather than later… we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels."
What this means, to be perfectly clear, is that if we DON'T confront the economic growth imperative all the rest of the good work we do to create green jobs will be moot.
That's a rather strong statement, tucked in inconspicuously in a one-page section of a 376-page document and, significantly, excluded from the summary report "for decision makers."
We know why this matter wasn't discussed more fully because the report tells us. The question about what to do about excessive consumption was "not part of the remit of this report." Let me repeat, it was "not part of the remit of this report" to look into a matter that could overwhelm (that is to say: bury, crush, submerge completely) all of the sophisticated methodological and technological innovations discussed in the other 375 pages of the report.
May I point out that is like getting ready to do a twelve-hour brain surgery without making sure there are double and triple back-ups in case of a power outage? As John Kenneth Galbraith remarked fifty years ago, it is like having a discussion about how to prevent traffic accidents while agreeing not to talk about speed.
There's a name for this bizarre phenomenon of skirting around the forbidden question. It's called "the elephant in the room." The White House blog mentioned the good-natured jockeying among cities and states for who was "greenest." By coincidence, earlier this week the City of Vancouver launched a program with the goal of making Vancouver "the greenest city in the world." In response to that, I started a facebook group called "The Greenest Elephant in the Room" because so much of the talk about green jobs sidesteps the single most direct and immediate way to cut greenhouse gas emissions (among other things) – reduce consumption, reduce the hours of work, share the work and spare the planet!
That brings me to the other brief section in the UNEP report, "A New Approach to Work Hours":
Industrial economies are extraordinarily productive-meaning that the same quantity of output can be produced with less and less human work. In principle, this can translate into either of two objectives: raising wages (in line with productivity) while holding working hours constant, or providing greater leisure time while holding income from wages constant. In practice, it has mostly been the former. Most people have been locked into a "work-and-spend" pattern.
Since the rise of mass industrialization in the late 19th century, there has been an ongoing tug-of-war between employers and unions over working hours… Employees have struggled for less work time – in the form of shortened workdays or weeks, extended vacation time, earlier retirement, or paid leave. These efforts were primarily motivated by a desire to improve the quality of life and to create more jobs. While environmental issues have not played a central role, channelling productivity gains toward more leisure time instead of higher wages that can translate into ever rising consumption also increasingly makes sense from an ecological perspective.The UNEP report "is correct when it states that it is crucial to retool not only the economy, but also economic thought." But then, amazingly, the report doesn't follow through on what could be done to retool economic thought! It focuses exclusively on the technological fix.
It is crucial to retool not only the economy, but also economic thought. Right now, economic actors are primed to respond to quantitative growth signals… A sustainable economy needs a different way of measuring human activity and of providing signals to investors, producers, and consumers. It needs a different theory, abandoning the outdated assumption that quantitative growth is unconditionally desirable and embracing instead the notion of qualitative growth.
It takes courage to talk about what has become taboo to mention – to name the elephant in the room. The brief sections in the UNEP report that discuss "rethinking consumption" and "a new approach to work hours" are pithy. Their brevity, though, and lack of follow-through speaks volumes.
Not Part of the Remit? Part I
by the Sandwichman
Notwithstanding the "danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient," how to tame that consumer juggernaut was "not part of the remit of this report", this report being the United Nations Environment Programme's "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World."
Is there an elephant in the room? I see one. Do you? But it is not part of the remit of this report to talk about the Greenest Elephant in the Room!.
When dealing with the juggernaut that could overwhelm even the most sophisticated methods and technologies is not in the remit, there is something fundamentally, radically, pathologically wrong with the remit.
Sooner rather than later, however, we need to confront the specter of insatiable consumerism itself. There is a danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient. Consuming better does not obviate the need to consider moderation in overall consumption levels.
Notwithstanding the "danger that the consumer juggernaut will overwhelm even the most sophisticated methods and technologies that can be devised to make consumption lean and super-efficient," how to tame that consumer juggernaut was "not part of the remit of this report", this report being the United Nations Environment Programme's "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World."
Is there an elephant in the room? I see one. Do you? But it is not part of the remit of this report to talk about the Greenest Elephant in the Room!.
When dealing with the juggernaut that could overwhelm even the most sophisticated methods and technologies is not in the remit, there is something fundamentally, radically, pathologically wrong with the remit.
Do Keynesian Economists Believe in Fairy Tales?
Oliver Staley and Michael McKee have a nice article entitled Yale’s Tobin Guides Obama From Grave as Friedman Is Eclipsed. John Cochrane is quoted as claiming the following:
Maybe Professor Cochrane is not aware that Dr. Tobin was including Keynesian economics in his graduate classes at Yale University. I’m sure other the macroeconomic classes in other graduate programs also spend considerable time explaining the contributions of Keynes, Tobin, et al. And we see that Professor Cochrane is still stuck on this discredited Treasury view. To claim that Keynesian economic represents a fairy tale that has been proven false shows how out of the loop Professor Cochrane happens to be.
Update: Brad DeLong wonders if Cochrane has an economic model to back up his argument for complete crowding-out. As Brad tries to fill in the blanks left by Cochrane, he realizes the following:
while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago. “It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.” To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the simulative effect, Cochrane said.
Maybe Professor Cochrane is not aware that Dr. Tobin was including Keynesian economics in his graduate classes at Yale University. I’m sure other the macroeconomic classes in other graduate programs also spend considerable time explaining the contributions of Keynes, Tobin, et al. And we see that Professor Cochrane is still stuck on this discredited Treasury view. To claim that Keynesian economic represents a fairy tale that has been proven false shows how out of the loop Professor Cochrane happens to be.
Update: Brad DeLong wonders if Cochrane has an economic model to back up his argument for complete crowding-out. As Brad tries to fill in the blanks left by Cochrane, he realizes the following:
If Cochrane were to present his model and argument for crowding out, it would sound--to me at least--pretty silly. It would carry the implication not just that government spending can't spur the economy, but that private spending by high-tech startups in the 1990s or by homebuilding compaanies in the 2000s did not spur the economy either--that it was simply chance that high-tech investment spending boomed in the late 1990s and the unemployment rate fell at the same time and that it was simply chance that home construction spending boomed in the mid 2000s and the unemployment rate fell at the same time. And Cochrane's position had not to my knowledge been seriously advanced--certainly Milton Friedman did not advance the view that there was always 100% crowding-out of fiscal policy--since R.G. Hawtrey and the "Treasury View" of the 1920s.
Pieces of Mind - Kyoto Protocol
Piece One:
Global models that include the feedbacks between climatic change and the carbon cycle have all shown decreased carbon sinks over the next century. [1]
Piece Two:
Growing trees absorb net quantities of CO2, and the higher levels of CO2 and nitrogen in the atmosphere are themselves stimulating tree and plant growth…. But the researchers expect these effects to reach saturation point and cease to have an effect. [2]
Piece Three:
What the researchers found limited the trees' capacity to respond to carbon fertilisation was a shortage of other nutrients, especially nitrogen. The availability of water was also important. ….The US and the other members of the so-called Umbrella Group (Japan, Switzerland, Canada, Australia, Norway, New Zealand and Russia) wanted to rely considerably on sinks in meeting their Kyoto targets for reducing emissions of greenhouse gases that may be warming the global climate. The European Union and others opposed this, arguing that open-ended use of sinks to absorb CO2 could allow countries to avoid making any actual emission cuts at all. [3]
Piece 4:
[Tree] respiration increases in response to temperature rises, which are triggered by the rising levels of CO2. Many scientists believe that respiration may be about to accelerate, turning the forests from sinks to sources of carbon…. They failed to recognise that this could happen because, although CO2 take-up is instantaneous, the warming that triggers respiration has a built-in delay of about 50 years, mainly because of the oceans' thermal inertia. So planting more trees could soon prove a quick way of speeding up climate change, not of moderating it. Bob Scholes, of the South African Government's research agency, CSIR, says it could be a costly mistake. "The carbon cycle has a very long equilibrium time. The consequences of actions taken now will persist for many centuries." [4]
[1] The First State of the Carbon Cycle Report (SOCCR)
The North American Carbon Budget and Implications for the Global Carbon Cycle
The Carbon Cycle in Land and Water Systems, Part III Overview.
Lead Author: R.A. Houghton, Woods Hole Research Center
http://www.climatescience.gov/Library/sap/sap2-2/final-report/sap2-2-final-part3overview.pdf
[2] Forests 'only temporary carbon absorbers'.
Wednesday, 7 November, 2001, 19:13 GMT
By Alex Kirby. BBC News Online environment correspondent
http://news.bbc.co.uk/2/hi/science/nature/1643156.stm
[3] Tree planting warning over global warming
Tree at sunset BBC
Trees may not live up to expectations for storing carbon dioxide
By BBC News Online's environment correspondent Alex Kirby
http://news.bbc.co.uk/2/hi/science/nature/1347068.stm
[4] Trees 'will not avert climate change'
Wednesday, October 20, 1999 Published at 22:49 GMT 23:49 UK
Sci/Tech
The world's forests can buy a little time, before they start adding to the warming
By Environment Correspondent Alex Kirby
http://news.bbc.co.uk/2/hi/science/nature/480339.stm
Wednesday, February 25, 2009
The Greenest Elephant in the Room
by the Sandwichman
The Sandwichman has started a facebook group called Greenest Elephant in the Room and fondly invites all EconoSpeak readers to join. There will be a Greenest Elephant in the Room contest, too!
No one can avoid noticing an elephant in the room. But respectable folks somehow know it's not polite to mention that it's there.
In response to the City of Vancouver's upcoming "Greenest City in the World" initiative (it will be announced sometime this week), the Greenest Elephant in the Room is dedicated to raising the "forbidden question" of reducing the workweek.
It's the most immediate and direct way to reduce material throughput while preserving and even creating jobs. Yet even as the current economic and environmental crises make the reduction of working time more urgent, serious proposals to do so are treated as curiosities from the fringe. Why is this so?
The Greenest Elephant in the Room suspects that there are a lot of economists, politicians and other respectable folks who would rather be silly than look silly by marching out of step with their silly peers. As John Maynard Keynes remarked of bankers, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
Tuesday, February 24, 2009
Jindal’s Reply to Obama’s Speech: I Have No Clue What You Intend To Do
As I post this, the President is speaking to the Congress on the economy. The Republican response will be delivered by a clueless person:
Jindal cannot argue that the stimulus bill raises taxes today as it cuts taxes at least in the short-run. Yes – the present value of future government spending plus any current debt must be financed by the present value of future taxes. So if the President was proposing a permanent increase in government spending, then Jindal might have a point. But had Jindal bothered to actually listen to what the President has been saying – the long-run plan is for fiscal restraint following the current temporary fiscal stimulus.
Jindal is seen by many in Republican circles as their next leader. Yes – Republicans does have a habit of letting economic know-nothings rise to the top of their party.
Update: I did not stay up to actually watch Jindal but some folks at Faux News did and they were not impressed. As David Weigel notes:
To solve our current problems, Washington must lead. But the way to lead is not to raise taxes and put more money and power in hands of Washington politicians ... Democratic leaders say their legislation will grow the economy. What it will do is grow the government, increase our taxes down the line, and saddle future generations with debt. Who among us would ask our children for a loan, so we could spend money we do not have, on things we do not need?
Jindal cannot argue that the stimulus bill raises taxes today as it cuts taxes at least in the short-run. Yes – the present value of future government spending plus any current debt must be financed by the present value of future taxes. So if the President was proposing a permanent increase in government spending, then Jindal might have a point. But had Jindal bothered to actually listen to what the President has been saying – the long-run plan is for fiscal restraint following the current temporary fiscal stimulus.
Jindal is seen by many in Republican circles as their next leader. Yes – Republicans does have a habit of letting economic know-nothings rise to the top of their party.
Update: I did not stay up to actually watch Jindal but some folks at Faux News did and they were not impressed. As David Weigel notes:
Brutal. No one seems to think Jindal performed well.
Monday, February 23, 2009
Is There a Speculative Bubble in Gold?
The price of gold topped $1,000 per ounce this past Friday, only the second time it has done that, the last being last March for a few days. Yes, I think there is a bubble, but some other observers disagree (Patrick Heller: "Gold Reaches $1,000 Again: This Time It's Different"). Heller claims that "this is different" (from last March), with "prudent buyers" still buying, and various "mainstream pension funds" getting into the act, with him forecasting a major "shortage" of gold coins and loose jewelry later this spring. He suggests we will not see a price below $1,000 again any time soon.
Quite aside from my vague sense from people coming up to me randomly with this sort of frenzied tone when asking me about gold (always a bad sign), there are some aspects of this that do not smell right. Sure, I would not be surprised if the price rises some more. This bubble could bubble away for some time more, even some months. But usually the drive to gold is a flight from currency based on fears of inflation. Now, maybe there are people fearing hyperinflation from the fiscal stimulus, but a lot of forward swap markets still show expectations of deflation. Jim Hamilton at econbrowser is all pleased that there was a slightly positive increase in the US CPI in January, but is still hoping for much more inflation (his favored target is a 3% rate), and the price of oil has only gone down since then.
Of course, a deeper possibility here is probably a fear of just total collapse of everything, call it fleeing from nameless black swans that may be flying towards us. The same sort of thing probably explains the newly recent highs we are seeing on the US dollar, this absurd "flight to quality" to the dollar, when it is facing massive foreign imbalances and indebtedness, rather like what happened in mid-September when we briefly saw negative nominal interest rates. However, the most likely Awful Event still does not look like the sort of hyperinflation that feeds the gold bugs's mania, but a deep decline into deep depression, which would mean deflation. This would mean a collapse of the price of gold. Sure looks like a speculative bubble to me.
Quite aside from my vague sense from people coming up to me randomly with this sort of frenzied tone when asking me about gold (always a bad sign), there are some aspects of this that do not smell right. Sure, I would not be surprised if the price rises some more. This bubble could bubble away for some time more, even some months. But usually the drive to gold is a flight from currency based on fears of inflation. Now, maybe there are people fearing hyperinflation from the fiscal stimulus, but a lot of forward swap markets still show expectations of deflation. Jim Hamilton at econbrowser is all pleased that there was a slightly positive increase in the US CPI in January, but is still hoping for much more inflation (his favored target is a 3% rate), and the price of oil has only gone down since then.
Of course, a deeper possibility here is probably a fear of just total collapse of everything, call it fleeing from nameless black swans that may be flying towards us. The same sort of thing probably explains the newly recent highs we are seeing on the US dollar, this absurd "flight to quality" to the dollar, when it is facing massive foreign imbalances and indebtedness, rather like what happened in mid-September when we briefly saw negative nominal interest rates. However, the most likely Awful Event still does not look like the sort of hyperinflation that feeds the gold bugs's mania, but a deep decline into deep depression, which would mean deflation. This would mean a collapse of the price of gold. Sure looks like a speculative bubble to me.
Update on "Gradual Decline Before the Crash"
Last July 12 I posted here on both old and recent work of mine on modeling how most bubbles experience "period of financial distress" after a peak during which they gradually decline for awhile before crashing. I noted the declines in deriviatives markets, identifying August 2007 as the peak. I warned of the danger of a crash, while holding back from outright forecasting one or when it might occur. Well, it occurred in mid-September with the general global meltdown after the failure of Lehmann Brothers, and was followed by a pretty steep crash of stock markets around the world.
I also note that housing continues to follow my forecast, that it is in a gradual decline since its peak in mid-2006, with no sign of a full-scale crash, although we are pretty clearly still well above a bottom. The other pattern for bubbles, of a crash immediately following a peak still looks like what happened to oil this past summer. Again, for the record, in the fourth edition of his Manias, Panics, and Crashes, of the 47 historical bubbles identified by Charles Kindleberger in his Appendix B, 37 of them followed the "period of financial distress" pattern, including all the really big ones, with the remainder about evenly split between the other two patterns.
I also note that housing continues to follow my forecast, that it is in a gradual decline since its peak in mid-2006, with no sign of a full-scale crash, although we are pretty clearly still well above a bottom. The other pattern for bubbles, of a crash immediately following a peak still looks like what happened to oil this past summer. Again, for the record, in the fourth edition of his Manias, Panics, and Crashes, of the 47 historical bubbles identified by Charles Kindleberger in his Appendix B, 37 of them followed the "period of financial distress" pattern, including all the really big ones, with the remainder about evenly split between the other two patterns.
Does Rick Newman Understand Either Moral Hazard or Option Valuation?
Rick Newman calls the possibility of temporarily nationalizing troubled banks “scary” for reasons that are being properly ridiculed – a topic we’ll come to in a moment. But let’s start with this claim:
The problem is not past decisions but the possible future decisions of zombie banks, that is, banks with liabilities exceeding the value of their assets. The fact that the government can observe a troubled bank does not erase the moral hazard dilemma inherent in letting the owners of these zombies continue to make management decisions. But the claim that is getting the most ridicule is as follows:
TPM reader AC nails this:
Paul Krugman recently made the same point:
While Newman is correct in the claim that there is some remote possibility that the future cash flows of these banks will turn positive, there is also the strong possibility that the future cash flows will turn even more negative. The difference between the current market price of these bank shares and this Geithner put option is the current expected present value of cash flows – with each element of the probability matrix accounted for. Dr. Krugman et al. argues that the present value is negative. What I guess scares Mr. Newman is that the bank shareholders might lose the value of this Geithner put option, which of course is what we taxpayers would be giving away for free if we do not nationalize these troubled banks.
It wouldn’t solve the underlying problem. The main problem at struggling banks like Citigroup is a mountain of losses – which the banks may not have enough cash to cover … The government can pump taxpayer dollars into banks to help cover losses, which it’s already doing. But even if it owns the banks, “the government can’t make embedded losses go away,” says economist James Barth of the nonprofit Milken Institute. “The question is how to prevent additional losses.” If troubled banks were making wild decisions that were exacerbating their problems, then a government takeover might be one way to install more prudent management. But by most accounts, government regulators are now watching troubled banks so carefully that they’re effectively clamping down on any risky moves anyway.
The problem is not past decisions but the possible future decisions of zombie banks, that is, banks with liabilities exceeding the value of their assets. The fact that the government can observe a troubled bank does not erase the moral hazard dilemma inherent in letting the owners of these zombies continue to make management decisions. But the claim that is getting the most ridicule is as follows:
A government takeover would vaporize a lot of wealth. This is why the markets freak out every time there’s a rumor, or a rumor of a rumor, about nationalization. If the government took over a bank, public shares would suddenly be worthless and shareholders would lose everything. With Citi and Bank of America shares down more than 90 percent over the last 12 months, many shareholders have already lost a fortune. But there’s still a chance they’ll get some of it back if the bank recovers. That potential upside would disappear if the feds stepped in.
TPM reader AC nails this:
the only reason that the 90% to 95% losses that many have taken is not 100% is because of the chance that the feds bail out the banks but leave some equity outstanding (e.g., the 40% Citi solution). This, of course, is just a transfer of wealth from taxpayers to bank shareholders--like Paulson's funding of Citi greater than their market cap, to take meaningfully less than a 100% stake.
Paul Krugman recently made the same point:
And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders. What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.
While Newman is correct in the claim that there is some remote possibility that the future cash flows of these banks will turn positive, there is also the strong possibility that the future cash flows will turn even more negative. The difference between the current market price of these bank shares and this Geithner put option is the current expected present value of cash flows – with each element of the probability matrix accounted for. Dr. Krugman et al. argues that the present value is negative. What I guess scares Mr. Newman is that the bank shareholders might lose the value of this Geithner put option, which of course is what we taxpayers would be giving away for free if we do not nationalize these troubled banks.
Sunday, February 22, 2009
The Kyoto Protocol. Oh No!
"Under Kyoto, emissions are allocated to the country where they are produced. By these rules, the UK can claim to have reduced emissions by about 18% since 1990 - more than sufficient to meet its Kyoto target. But research published last year by the Stockholm Environment Institute (SEI) suggests that, once imports, exports and international transport are accounted for, the real change for the UK has been a rise in emissions of more than 20%...." [1]
"VICTORIA'S bushfires have released a massive amount of carbon dioxide into the atmosphere - almost equal to Australia's industrial emission for an entire year. Mark Adams, from the University of Sydney, said the emissions from bushfires were far beyond what could be contained through carbon capture and needed to be addressed in the next international agreement. "Once you are starting to burn millions of hectares of eucalypt forest, then you are putting into the atmosphere very large amounts of carbon," Professor Adams said. In work for the Bushfire Co-operative Research Centre, he estimated the 2003 and 2006-07 bushfires could have put 20-30million tonnes of carbon (70-105 million tonnes of carbon dioxide) into the atmosphere. "That is far, far more than we're ever going to be able to sequester from planting trees or promoting carbon capture," he said..... [2]
Whatever were the chances of success of the Kyoto forum? The Australian (Labor) Government appointed the heads of the Australian National Association of Forest Industries (NAFI) as members of the official Australian delegation to the United Nations Framework Convention on Climate Change (UNFCCC) meeting in Bali in December 2007. [3] Prime Minister, Rudd, placed little value on selecting delegates with an appropriate background of study on climate change dynamics. NAFI CEO, Catherine Murphy was then free to spout her usual ill-informed logic at this critical international forum "Forestry is the only carbon positive industry and plays a significant role in reducing greenhouse gases in the Earth’s atmosphere....” [4]
James Lovelock would have been a much better forestry delegate: ". "Carbon offsetting? I wouldn't dream of it. It's just a joke. To pay money to plant trees, to think you're offsetting the carbon? You're probably making matters worse. You're far better off giving to the charity Cool Earth, which gives the money to the native peoples to not take down their forests." [5]
In these times of rapid and threatening climate change we can still enjoy life...for now...with the lights off.
[1] West blamed for rapid increase in China's CO2
[Consumer exports behind 15% of emissions - study]
Duncan Clark. The Guardian, Monday 23 February 2009
http://www.guardian.co.uk/environment/2009/feb/23/china-co2-emissions-climate
[2] Bushfires release huge carbon load
Asa Wahlquist, Rural writer | February 13, 2009
Article from: The Australian
http://www.theaustralian.news.com.au/story/0,25197,25047322-11949,00.html
[3] NAFI represents Australian forest industry at Bali climate change meetings
http://www.nafi.com.au/news/view.php3?id=1788
[4] NAFI welcomes ratification of Kyoto Protocol by the Australian Government. December 2007. http://www.nafi.com.au/news/view.php3?id=1789
[5] 'Enjoy life while you can'
* Decca Aitkenhead * The Guardian, * Saturday March 1 2008
http://www.guardian.co.uk/theguardian/2008/mar/01/scienceofclimatechange.climatechange?gusrc=rss&feed=networkfront
Senator McConnell: For Short-term Fiscal Restraint But Against Long-Term Fiscal Restraint
Advocates of long-term fiscal restraint often argue ala the Solow growth model that increases in national savings lead to more investment as long as we can assume full employment is maintained. During periods of weak aggregate demand (such as the current one), a strong case for short-term fiscal expansion can be made. The Obama stimulus bill was designed to reverse the slide in aggregate demand. However, Senator McConnell and other Washingtonian Republicans – aka the neo-Hooverites - opposed this fiscal stimulus on the grounds that it sacrificed fiscal responsibility.
President Obama has trumped these fools by arguing for long-term fiscal responsibility. John King asked Senator McConnell about the President’s proposal to reduce the government deficit over the long-run in part by letting the Bush tax cuts for the very rich sunset:
Excuse me but recessions do not last forever and the President was clear that he has been talking about a mix of short-term fiscal stimulus and long-term restraint. Is McConnell really this stupid? I doubt it as his hypocrisy has been standard Republican practice for over a generation. They justified the 1981 tax cut on the grounds that we had a recession to deal with – never mind the fact that fiscal policy was operating at cross purposes with Volcker’s monetary policy. We would have had more national savings had we had less fiscal stimulus and a quicker path to lower interest rates. Bush43’s tax cuts may have been sold as dealing with the 2001 recession but the truth was they were not as much about immediate fiscal stimulus and more backloaded in their impact on aggregate demand. We continued to hear GOP calls for making the tax cuts permanent even as the economy rebounded and the Federal Reserve chose to raise interest rates.
For McConnell to use the recession as an excuse not to eventually raise taxes is pure hypocrisy. But it is also standard Republican rhetoric – as stupid as this rhetoric may be.
President Obama has trumped these fools by arguing for long-term fiscal responsibility. John King asked Senator McConnell about the President’s proposal to reduce the government deficit over the long-run in part by letting the Bush tax cuts for the very rich sunset:
So we have got to ask ourselves whether increasing capital gains taxes, dividend taxes and taxes on small businesses is a great thing to do in the middle of a deep recession.
Excuse me but recessions do not last forever and the President was clear that he has been talking about a mix of short-term fiscal stimulus and long-term restraint. Is McConnell really this stupid? I doubt it as his hypocrisy has been standard Republican practice for over a generation. They justified the 1981 tax cut on the grounds that we had a recession to deal with – never mind the fact that fiscal policy was operating at cross purposes with Volcker’s monetary policy. We would have had more national savings had we had less fiscal stimulus and a quicker path to lower interest rates. Bush43’s tax cuts may have been sold as dealing with the 2001 recession but the truth was they were not as much about immediate fiscal stimulus and more backloaded in their impact on aggregate demand. We continued to hear GOP calls for making the tax cuts permanent even as the economy rebounded and the Federal Reserve chose to raise interest rates.
For McConnell to use the recession as an excuse not to eventually raise taxes is pure hypocrisy. But it is also standard Republican rhetoric – as stupid as this rhetoric may be.
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