Today, August 24, 2010, is the 40th anniversary of the bombing of Sterling Hall on the University of Wisconsin-Madison campus. For the first time since then, family of the anti-war physics researcher, Robert Fassnacht, who was killed in the bombing, have spoken publicly, notably his daughter, Heidi, in this past Sunday's Wisconsin State Journal.
She reports that the family is doing fine, and his son is now a professional astronomer. She also reports that at the time of his death, it was believed by many around him that Robert Fassnacht was nearing a scientific breakthrough in cryogenics that might have aided long distance electricity transmission. He was up late keeping an eye on the Dewar flask of liquid helium for supercooling in his lab's experiments. The last person who saw him alive was a security guard who saw him at 3:30 AM and reminded him to turn off the lights when he was done. The guard saw him sitting at his desk "furiously scribbling notes on a pad" that was destroyed by the bomb, along with all the lab's equipment, which went off 12 minutes later.
The anniversary has also brought forth the start of an oral history project about the bombing on the UW-Madison campus, which is to result in a play in Spring 2012, as reported in the Milwaukee Journal-Sentinel. The online commentary there is pretty bizarre.
Leo Burt, one of the four bombers, remains at large. Of the others, all of whom served prison time, Karl Armstrong runs a fruit juice stand in Madison; David Fine is a paralegal in Oregon, and Karl's younger brother, Dwight, died earlier this year. A late comment on that post on Aug. 6 by "Christopher" sympathetically describes the much-troubled Dwight in his final year of life.
In my earlier post I reported that Karl Armstrong had unequivocally apologized for his actions, something that is not what one sees in some sources. In tracking this down for confirmation of what I heard in person, I came across a fascinating 72-page senior honors thesis (.pdf) from Lawrence University in 2004 by Andrea Rochelle Blimling entitled, "Blood on the Third Coast: Consequences of Madison's 1970 Sterling Hall Bombing". This is extremely interesting and largely accurate, as near as I can tell and remember. One can find a statement of remorse by Karl Armstrong on p. 55, and an account of what I reported on p. 58, although it differs slightly from my memory (its source is Paul Soglin, then Madison's mayor, who was in attendance as I reported). I remember Karl Armstrong saying more than Soglin recalls, and I recall dead silence after his speech, with no attempted rebuke by Ken Mate.
BTW, I found this thesis while searching for an article in the Wisconsin State Journal that reported Armstrong's apology, but could not find it. However, I remember it well because my father read it and snorted in disgust and skepticism at the report of this apology. It was probably the last comment my father made on the matter, as he died less than two months later.
For the historical record, I note some minor errors in the otherwise very well done senior honors thesis.
The Dow demonstrations of October 1967 were a year and a half after the Selective Service demonstrations of Spring, 1966, not the "next semester."
The name of the local Congressman was "Kastenmeier," not "Kastenmeyer."
The anti-war Teach-In of 1965 took place in 6210 Social Science, not its supposed "Great Hall." The Great Hall is on the fourth floor of the Memorial Union and has been the site of many events, including many political ones, but many others as well, including the retirement dinner of my late father in 1978, Director at the time of the bombing of the Center that was the target.
Most of the Center's offices were on lower floors than the seventh, although above the labs that were hit by the bombing.
The protester who was unhappy with Paul Soglin in 2004 was Lee "Zeldin," not "Zelbin."
And the report pointed out an error in my posting. It was 2003, not 2005, when Paul Soglin ran again for mayor, and lost, being "the most conservative candidate" running.
My final comment on the anniversary of this tragedy, besides being glad to hear that Robert Fassnacht's family is doing well, is to hope as Peter Dorman noted in comments on my last posting, that if Leo Burt is still alive (or even if he is dead as many think), that he did or has made something useful of his life on the lam to somehow atone for what he did on August 24, 1970.
Tuesday, August 24, 2010
Monday, August 23, 2010
Inflation Fear Mongering
Our graph shows the interest rate on 10-year Treasuries from April 1, 2009 to now. Notice a bit of interest rate volatility with rates at times climbing to around 4 percent but the current interest rate being near 2.6 percent.
Scott Lanman and Simon Kennedy report that Raghuram Rajan is arguing for tight monetary policy. Paul Krugman rightfully ridicules this policy recommendation but he lets this particular line go untouched:
Between June 3 and June 8, 2009, yields on 10-year Treasuries rose to 3.88 percent from 3.54 percent after the smallest drop in U.S. payrolls in eight months
Why do we care that interest rates rose by 34 basis points in a week over a year ago in light of the fact that the interest rate on 10-year Treasury bills is now done around 2.6 percent? Does Lanman and Kennedy really think the slightest tendency to see decent real GDP growth is going to cause rising inflation and nominal interest rates?
Sunday, August 22, 2010
Excessive Compensation -- Academic Style
Higher education is not undergoing something like the financial reengineering craze that was so popular and so destructive in corporate America more than a decade ago -- cutting back on the workers and loading university presidents of million dollar salaries and perqs.
Here is the New York Times take on the lavish housing expenditures for Mark Yudof, president of the University of California. Everyone else is expected to willingly accept the necessary sacrifices for the good of the organization. The article begins with a "midnight move ... the latest chapter in a two-year housing drama that has cost the university more than $600,000 and has drawn senior U.C. officials into an increasingly time-consuming and acrimonious ordeal over the president’s private residence."
Fainaru, Steve. 2010. "University Head’s Housing Raises Ire." New York Times (21 August): p. A 23A.
http://www.nytimes.com/2010/08/22/education/22bcyudof.html?_r=2&ref=us&pagewanted=all
Here is the New York Times take on the lavish housing expenditures for Mark Yudof, president of the University of California. Everyone else is expected to willingly accept the necessary sacrifices for the good of the organization. The article begins with a "midnight move ... the latest chapter in a two-year housing drama that has cost the university more than $600,000 and has drawn senior U.C. officials into an increasingly time-consuming and acrimonious ordeal over the president’s private residence."
Fainaru, Steve. 2010. "University Head’s Housing Raises Ire." New York Times (21 August): p. A 23A.
http://www.nytimes.com/2010/08/22/education/22bcyudof.html?_r=2&ref=us&pagewanted=all
Friday, August 20, 2010
Subprime Education Scam: Guaranteed by Government
At a time when the country is getting ready to gut Social Security, Pensions, .... Here is the way our government husbands its resources.
Winkler, Rolfe. 2010. "For-Profit Schools Put in Detention." Wall Street Journal (21 August)
http://online.wsj.com/article/SB10001424052748703579804575441591409292762.html?mod=WSJ_Markets_section_Heard#articleTabs%3Darticle
Early death reports are known to be exaggerated. For-profit educators' may be an example. With Congress and regulators threatening to cut off federal funding, share prices for the industry's top six by market capitalization have dropped by an average of 40% since May. From 2000 to 2009, the industry grew explosively, thanks to increased government spending and Bush-era deregulation permitting aggressive sales tactics. Taxpayer-guaranteed loans and grants flowing to the industry more than quintupled during those years, to $26.5 billion from $4.6 billion."
"Earning risk-free profits on taxpayer-guaranteed loans tends to lead to lower lending standards. Such is the case with firms like Apollo Group, ITT Educational Services and Career Education. They often market to low-income prospects -- eligible for the most aid -- and sell them high-priced degrees, maximizing government largess."
Here is the URL for the GAO study:
http://www.gao.gov/products/GAO-10-948T
I will post some more on this later:
Here is the rest of the Wall Street Journal article:
"ITT's two-year associate degrees can cost as much as $47,000, estimates Kelly Flynn of Credit Suisse. Yet the average starting salary for employed graduates -- 73% of 2009's class found jobs by April -- is only "slightly north" of $30,000, says the company. So default rates are high: 24% so far for loans extended in 2007. On some loans ITT extends itself, the company may assume close to a 45% loss rate up front, Ms. Flynn estimates."
"But losses on loans matter little for the companies. Since 85% of ITT's 2009 revenue came from government funds, taxpayers will suffer the deepest financial wounds. Government revenue for Apollo and Career Education in 2009 was 86% and 80%, respectively."
"Proposed regulations would, among other things, cut off government funds if new tests show the debt burden on students is too high relative to post-graduate earnings. Data released by the Department of Education suggest that, to pass the tests, schools may have to cut tuition significantly. Meanwhile, on Capitol Hill, Sen. Tom Harkin may introduce tough reform legislation after the Government Accountability Office exposed the industry's hard-sell tactics."
"The latest push by schools is to target veterans, whose benefits let for-profit institutions skirt a rule that 10% of sales come from nongovernment sources. Strangely, such benefits count as nongovernment. The top five schools enrolling veterans are for-profit."
"Increased scrutiny will rightly keep the industry in detention for the moment. Although some appear cheap -- Apollo, Career Education and ITT trade at an average of six times 2010 estimated earnings -- it is risky to capitalize future profits that could be legislated away."
"And yet, just as Washington is now helping to crush the stocks, it is also likely to be what makes their longer-term survival likely. For the government to meet its goal of substantially increasing college graduates by 2020, it will need the for-profit sector. One example: Veterans Administration education benefits will increase to $9.5 billion this year from $4.2 billion. The financial aid gravy train that for-profit schools have so adeptly ridden is set to keep rolling."
Winkler, Rolfe. 2010. "For-Profit Schools Put in Detention." Wall Street Journal (21 August)
http://online.wsj.com/article/SB10001424052748703579804575441591409292762.html?mod=WSJ_Markets_section_Heard#articleTabs%3Darticle
Early death reports are known to be exaggerated. For-profit educators' may be an example. With Congress and regulators threatening to cut off federal funding, share prices for the industry's top six by market capitalization have dropped by an average of 40% since May. From 2000 to 2009, the industry grew explosively, thanks to increased government spending and Bush-era deregulation permitting aggressive sales tactics. Taxpayer-guaranteed loans and grants flowing to the industry more than quintupled during those years, to $26.5 billion from $4.6 billion."
"Earning risk-free profits on taxpayer-guaranteed loans tends to lead to lower lending standards. Such is the case with firms like Apollo Group, ITT Educational Services and Career Education. They often market to low-income prospects -- eligible for the most aid -- and sell them high-priced degrees, maximizing government largess."
Here is the URL for the GAO study:
http://www.gao.gov/products/GAO-10-948T
I will post some more on this later:
Here is the rest of the Wall Street Journal article:
"ITT's two-year associate degrees can cost as much as $47,000, estimates Kelly Flynn of Credit Suisse. Yet the average starting salary for employed graduates -- 73% of 2009's class found jobs by April -- is only "slightly north" of $30,000, says the company. So default rates are high: 24% so far for loans extended in 2007. On some loans ITT extends itself, the company may assume close to a 45% loss rate up front, Ms. Flynn estimates."
"But losses on loans matter little for the companies. Since 85% of ITT's 2009 revenue came from government funds, taxpayers will suffer the deepest financial wounds. Government revenue for Apollo and Career Education in 2009 was 86% and 80%, respectively."
"Proposed regulations would, among other things, cut off government funds if new tests show the debt burden on students is too high relative to post-graduate earnings. Data released by the Department of Education suggest that, to pass the tests, schools may have to cut tuition significantly. Meanwhile, on Capitol Hill, Sen. Tom Harkin may introduce tough reform legislation after the Government Accountability Office exposed the industry's hard-sell tactics."
"The latest push by schools is to target veterans, whose benefits let for-profit institutions skirt a rule that 10% of sales come from nongovernment sources. Strangely, such benefits count as nongovernment. The top five schools enrolling veterans are for-profit."
"Increased scrutiny will rightly keep the industry in detention for the moment. Although some appear cheap -- Apollo, Career Education and ITT trade at an average of six times 2010 estimated earnings -- it is risky to capitalize future profits that could be legislated away."
"And yet, just as Washington is now helping to crush the stocks, it is also likely to be what makes their longer-term survival likely. For the government to meet its goal of substantially increasing college graduates by 2020, it will need the for-profit sector. One example: Veterans Administration education benefits will increase to $9.5 billion this year from $4.2 billion. The financial aid gravy train that for-profit schools have so adeptly ridden is set to keep rolling."
The Current Moment in Macropolicy
A week ago, a Portuguese journalist asked me a few questions about current debates in macroeconomic policy: fiscal stimulus and monetary expansion versus deficit and inflation hawkery. I used the opportunity to organize some of the arguments I've presented in previous posts.
1. With near-zero percent interest rates (negative in real terms) and $2.3 trillion balance sheet, and no clear results translated in growth, employment and credit to the real economy, which feasible options has the Federal Reserve? Is the FED playing a dangerous gamble as Kansas City FED’s chairman just said?
These are really two questions: (a) What arrows does the Fed still have in its quiver? (b) Is the Fed’s current set of policies elevating the risk of future inflation?
a) As many, including Ben Bernanke’s former self, have pointed out, the Fed can engage in almost unlimited balance sheet expansion through purchases of private sector debt. Thus, rather than exchanging MBS and similar items as they mature with long-term government debt–the current “hold steady” policy–the Fed could acquire even more. This option is predicated on the assumption that the economy can absorb much more liquidity, that the true risk is deflation rather than inflation. My own view is that a bit of additional quantitative easing can help at the margin, but that fiscal policy would more effectively offset the effects of private sector deleveraging on effective demand. Moreover, the level of private sector debt acquisition necessary to fully absorb this deleveraging would expose the Fed, and US taxpayers, to significant credit risk.
Another proposal is that the Fed should raise its announced inflation target. This originates with Krugman and is receiving a lot of support. To see why this may not work, note that it rests on two premises: first, that agents will adopt the target as their new basis for calculating real interests rates (making real rates more negative at the zero nominal lower bound), and that this recalculation will induce them to resume borrowing. The first is rather a leap under current conditions; why should agents believe that the announced target will be realized within their planning horizons? The second overlooks the fact that (1) many sectors of the US economy really are overleveraged and need to reduce their debt burdens, and (2) investment is stymied by a lack of anticipated demand, not the real cost of credit. But I don’t think raising the target will cause any harm, so why not? It would then be more consistent with the emerging view of (some) macroeconomists that the optimal inflation band in normal times may have an upper bound of 3-4%.
I should add that the weight now being placed on the Fed’s shoulders is unfair. Everyone is looking to them to forestall a second dip and put the US (and world) economy on a growth track, but that’s because we have given up on Obama’s willingness/ability to push significant policy through Congress. The Fed just can’t do it alone; it needs lots of help. The political paralysis in the US is an extremely important contextual factor. If the global economy does take a second plunge or simply remains mired for a prolonged period, future historians will surely place much more of the blame on Obama and Congress than Bernanke and the Fed. But they will also have harsh words for the failure of global policy coordination, with no leader willing to rise above short-term domestic political motives.
b) In the short run it is obvious that inflation is not a problem. First, it would require monetary expansion of Zimbabwean proportions to induce serious inflation at current levels of unemployment and productive slack. Second, a bit more inflation would be a good thing. The real question is, if the Fed continues to bulk up its balance sheet and private sector credit starts flowing again, can the Fed get out in time so that there isn’t an explosion in the money supply? Most economists, myself included, think that easing of credit conditions will be gradual and visible, so that the Fed can exit as the private sector reabsorbs its debt. From a political point of view, to allow a given stock of debt to shift back from public to private hands is neutral with respect to macropolicy, so there is no reason to expect that the Fed will fail to do this. Having said this, however, I think the risk of a future inflationary surge as a result of current policies is not zero. Deleveraging could be reversed at a speed the Fed can’t keep up with. Or the specific markets that would be impacted by a Fed asset sale might not be sufficiently liquid: the Fed holds asset A and the public wants asset B. Or some other problem, currently unforseen, could interfere with the Fed’s withdrawal from private markets. On balance, though, the near-term risk of deflation exceeds the highly speculative longer-term risk of inflation.
2. Has federal Treasury political support to new Keynesian interventions preventing the risk of a double-dip, or the debt-to-GDP, the fiscal deficit-to-GDP and slightly changes from Chinese Central Bank policy gives no fiscal space for those options?
Rewording, I see the question, do either the trajectory of US fiscal deficits/debt to GDP ratio or the prospects for reduced Chinese demand for this debt limit the ability of the US government to implement a second round of stimulus? Again there are two questions.
a) I think the attempt to impose a mechanical rule for fiscal debt/GDP are misguided and have no basis in the historical evidence. The reason is that fiscal deficits are endogenous: they are jointly determined by private sector debt growth, the external balance, terms of trade, and other factors that influence both the numerator and the denominator. (And politics, of course.) Economics has a lot to say about the exact ways these factors interact, but in any given situation you have to evaluate policy on the basis of the full set of variables. For instance, to make an obvious point, on the one hand the US has for some time had a structural trade deficit of substantial proportions, and the economy has organized itself around chronically high private and public deficits. (We are biased toward the production of goods financed by these deficits: housing, military goods, etc.) On the other, the dollar remains the world’s primary reserve currency, and this fact permits the US to borrow much more than others might–the “exorbitant privilege”, in Eichengreen’s term. (Portugal too could borrow much more if the ECB were willing to underwrite all your debt, which they aren’t. We don’t have this problem with the Fed in the US.) In a nutshell, I don’t think the US faces an immediate constraint on its ability to market its public debt, and the deeper problem is the current account imbalance that necessitates this debt.
b) There are many aspects, some rather complex, in the China-US financial relationship, but the broad outlines are simple. China, along with the other surplus countries, finances US net borrowing, and the reason this net borrowing needs to be financed is that these countries have surpluses vis-a-vis the US. In principle, the solution is rebalancing, which would mean less financing and less debt, simultaneously and equally. In real life, of course, there are potential potholes in this road. The main risk is that there could be a sudden stop if confidence in dollar assets drops unexpectedly. This risk is ever-present and is proportional, more or less, to the scale of dollar recycling. Therefore a gradual Chinese retrenchment, if it means reduced trade surpluses, directly or indirectly, with the US, would be very positive for the world economy.
But it’s not only China. The US runs deficits with the EU, the oil exporters and just about everyone else. We need rebalancing on every front. This would remove much of the need for Keynesian stimulus in the US. It should be obvious: a country with a roughly balanced current account finances episodes of fiscal stimulus domestically. A deficit country is likely to require more stimulus more often and must finance to some extent externally. This second condition is less sustainable. You would think we wouldn’t have to argue about this.
3. America and Europe is living a deficit hysteria regarding the hot topic of “debt-to-growth”, or a deficit threshold is a real problem for future growth?
Hysteria.
4. You refer, in your critic of Rogoff and Reinhart debt-to-GDP threshold that the most important is to identify the processes, the mechanisms governing the expansion and contraction of fiscal space. Can you argue more extensively about that?
I think I did this above, up to a point. Perhaps I should emphasize the particular importance of looking at public debt in the context of private debt. The US ran fiscal surpluses under Clinton, but this was possible (especially in a deficit country) only to the extent that private debt exploded. Private deficits fell in the aftermath of the dot.com bubble, and (again in the context of external deficits) the US faced the choice between much higher fiscal deficits or punishing shortfalls in aggregate demand. We went with the fiscal deficits in the 00's, especially since we didn’t face a borrowing constraint. Spain, by contrast, was a model of fiscal rectitude in the 00's, but their external deficits were monumental and financed by private leverage. The collapse of the housing bubble puts Spain in a position like the US in 2002, except (1) Spain’s current account deficit is even larger, and (2) they face a severe borrowing constraint. The moral of the story is that anyone who looked at the US in the 90's or Spain in the 00's and said, “No problem, the public budget is under control” would be making a big mistake. (And to dig back in history, the US emerged from WWII with a gargantuan public debt, far beyond the R&R threshold, but with little private debt in the wake of Depression-era writedowns, and the prospect of large, continuing structural trade surpluses.)
I used the R-R thesis as an opportunity to make a more general point about economics, what it can do well and what it can’t. Economists try to be like physicists, formulating the “laws of nature”. The Reinhart/Rogoff 90% rule is a rough version of this approach, aspiring to provide something like a gravitational constant. But the subject matter of economics is too complex for this approach; it is more like geology or ecology. A geologist does not have a formula that explains the location and height of every mountain range on earth, or even the “mean mountain”, but detailed knowledge of the forces (plate tectonics, erosion, isostatic uplift, etc.) that constitute the menu of possibilities. Then he or she goes to a particular region, provides a deep description of the local factors at work, and applies the knowledge of geological processes.
It is revealing that R&R have very little to say about processes–exactly how public debt/GDP ratios affect further growth. Their comments in this respect are casual, not the product of careful research. Instead, they search for a single, simple pattern in growth/debt ratio space. It is ineffective physics, rather than the geology we actually need.
1. With near-zero percent interest rates (negative in real terms) and $2.3 trillion balance sheet, and no clear results translated in growth, employment and credit to the real economy, which feasible options has the Federal Reserve? Is the FED playing a dangerous gamble as Kansas City FED’s chairman just said?
These are really two questions: (a) What arrows does the Fed still have in its quiver? (b) Is the Fed’s current set of policies elevating the risk of future inflation?
a) As many, including Ben Bernanke’s former self, have pointed out, the Fed can engage in almost unlimited balance sheet expansion through purchases of private sector debt. Thus, rather than exchanging MBS and similar items as they mature with long-term government debt–the current “hold steady” policy–the Fed could acquire even more. This option is predicated on the assumption that the economy can absorb much more liquidity, that the true risk is deflation rather than inflation. My own view is that a bit of additional quantitative easing can help at the margin, but that fiscal policy would more effectively offset the effects of private sector deleveraging on effective demand. Moreover, the level of private sector debt acquisition necessary to fully absorb this deleveraging would expose the Fed, and US taxpayers, to significant credit risk.
Another proposal is that the Fed should raise its announced inflation target. This originates with Krugman and is receiving a lot of support. To see why this may not work, note that it rests on two premises: first, that agents will adopt the target as their new basis for calculating real interests rates (making real rates more negative at the zero nominal lower bound), and that this recalculation will induce them to resume borrowing. The first is rather a leap under current conditions; why should agents believe that the announced target will be realized within their planning horizons? The second overlooks the fact that (1) many sectors of the US economy really are overleveraged and need to reduce their debt burdens, and (2) investment is stymied by a lack of anticipated demand, not the real cost of credit. But I don’t think raising the target will cause any harm, so why not? It would then be more consistent with the emerging view of (some) macroeconomists that the optimal inflation band in normal times may have an upper bound of 3-4%.
I should add that the weight now being placed on the Fed’s shoulders is unfair. Everyone is looking to them to forestall a second dip and put the US (and world) economy on a growth track, but that’s because we have given up on Obama’s willingness/ability to push significant policy through Congress. The Fed just can’t do it alone; it needs lots of help. The political paralysis in the US is an extremely important contextual factor. If the global economy does take a second plunge or simply remains mired for a prolonged period, future historians will surely place much more of the blame on Obama and Congress than Bernanke and the Fed. But they will also have harsh words for the failure of global policy coordination, with no leader willing to rise above short-term domestic political motives.
b) In the short run it is obvious that inflation is not a problem. First, it would require monetary expansion of Zimbabwean proportions to induce serious inflation at current levels of unemployment and productive slack. Second, a bit more inflation would be a good thing. The real question is, if the Fed continues to bulk up its balance sheet and private sector credit starts flowing again, can the Fed get out in time so that there isn’t an explosion in the money supply? Most economists, myself included, think that easing of credit conditions will be gradual and visible, so that the Fed can exit as the private sector reabsorbs its debt. From a political point of view, to allow a given stock of debt to shift back from public to private hands is neutral with respect to macropolicy, so there is no reason to expect that the Fed will fail to do this. Having said this, however, I think the risk of a future inflationary surge as a result of current policies is not zero. Deleveraging could be reversed at a speed the Fed can’t keep up with. Or the specific markets that would be impacted by a Fed asset sale might not be sufficiently liquid: the Fed holds asset A and the public wants asset B. Or some other problem, currently unforseen, could interfere with the Fed’s withdrawal from private markets. On balance, though, the near-term risk of deflation exceeds the highly speculative longer-term risk of inflation.
2. Has federal Treasury political support to new Keynesian interventions preventing the risk of a double-dip, or the debt-to-GDP, the fiscal deficit-to-GDP and slightly changes from Chinese Central Bank policy gives no fiscal space for those options?
Rewording, I see the question, do either the trajectory of US fiscal deficits/debt to GDP ratio or the prospects for reduced Chinese demand for this debt limit the ability of the US government to implement a second round of stimulus? Again there are two questions.
a) I think the attempt to impose a mechanical rule for fiscal debt/GDP are misguided and have no basis in the historical evidence. The reason is that fiscal deficits are endogenous: they are jointly determined by private sector debt growth, the external balance, terms of trade, and other factors that influence both the numerator and the denominator. (And politics, of course.) Economics has a lot to say about the exact ways these factors interact, but in any given situation you have to evaluate policy on the basis of the full set of variables. For instance, to make an obvious point, on the one hand the US has for some time had a structural trade deficit of substantial proportions, and the economy has organized itself around chronically high private and public deficits. (We are biased toward the production of goods financed by these deficits: housing, military goods, etc.) On the other, the dollar remains the world’s primary reserve currency, and this fact permits the US to borrow much more than others might–the “exorbitant privilege”, in Eichengreen’s term. (Portugal too could borrow much more if the ECB were willing to underwrite all your debt, which they aren’t. We don’t have this problem with the Fed in the US.) In a nutshell, I don’t think the US faces an immediate constraint on its ability to market its public debt, and the deeper problem is the current account imbalance that necessitates this debt.
b) There are many aspects, some rather complex, in the China-US financial relationship, but the broad outlines are simple. China, along with the other surplus countries, finances US net borrowing, and the reason this net borrowing needs to be financed is that these countries have surpluses vis-a-vis the US. In principle, the solution is rebalancing, which would mean less financing and less debt, simultaneously and equally. In real life, of course, there are potential potholes in this road. The main risk is that there could be a sudden stop if confidence in dollar assets drops unexpectedly. This risk is ever-present and is proportional, more or less, to the scale of dollar recycling. Therefore a gradual Chinese retrenchment, if it means reduced trade surpluses, directly or indirectly, with the US, would be very positive for the world economy.
But it’s not only China. The US runs deficits with the EU, the oil exporters and just about everyone else. We need rebalancing on every front. This would remove much of the need for Keynesian stimulus in the US. It should be obvious: a country with a roughly balanced current account finances episodes of fiscal stimulus domestically. A deficit country is likely to require more stimulus more often and must finance to some extent externally. This second condition is less sustainable. You would think we wouldn’t have to argue about this.
3. America and Europe is living a deficit hysteria regarding the hot topic of “debt-to-growth”, or a deficit threshold is a real problem for future growth?
Hysteria.
4. You refer, in your critic of Rogoff and Reinhart debt-to-GDP threshold that the most important is to identify the processes, the mechanisms governing the expansion and contraction of fiscal space. Can you argue more extensively about that?
I think I did this above, up to a point. Perhaps I should emphasize the particular importance of looking at public debt in the context of private debt. The US ran fiscal surpluses under Clinton, but this was possible (especially in a deficit country) only to the extent that private debt exploded. Private deficits fell in the aftermath of the dot.com bubble, and (again in the context of external deficits) the US faced the choice between much higher fiscal deficits or punishing shortfalls in aggregate demand. We went with the fiscal deficits in the 00's, especially since we didn’t face a borrowing constraint. Spain, by contrast, was a model of fiscal rectitude in the 00's, but their external deficits were monumental and financed by private leverage. The collapse of the housing bubble puts Spain in a position like the US in 2002, except (1) Spain’s current account deficit is even larger, and (2) they face a severe borrowing constraint. The moral of the story is that anyone who looked at the US in the 90's or Spain in the 00's and said, “No problem, the public budget is under control” would be making a big mistake. (And to dig back in history, the US emerged from WWII with a gargantuan public debt, far beyond the R&R threshold, but with little private debt in the wake of Depression-era writedowns, and the prospect of large, continuing structural trade surpluses.)
I used the R-R thesis as an opportunity to make a more general point about economics, what it can do well and what it can’t. Economists try to be like physicists, formulating the “laws of nature”. The Reinhart/Rogoff 90% rule is a rough version of this approach, aspiring to provide something like a gravitational constant. But the subject matter of economics is too complex for this approach; it is more like geology or ecology. A geologist does not have a formula that explains the location and height of every mountain range on earth, or even the “mean mountain”, but detailed knowledge of the forces (plate tectonics, erosion, isostatic uplift, etc.) that constitute the menu of possibilities. Then he or she goes to a particular region, provides a deep description of the local factors at work, and applies the knowledge of geological processes.
It is revealing that R&R have very little to say about processes–exactly how public debt/GDP ratios affect further growth. Their comments in this respect are casual, not the product of careful research. Instead, they search for a single, simple pattern in growth/debt ratio space. It is ineffective physics, rather than the geology we actually need.
Thursday, August 19, 2010
New Video Stream Now on Youtube
Sorry about the confusion. I redid the talk on Youtube, which got rushed as I neared my 15 minute limit.
http://www.youtube.com/watch?v=2hNt_qc-RvMRedoing Last Night's Video
My apologies. For some reason, my video did not record after 19 seconds. I'm sorry for the inconvenience for those of you who sat through the Budweiser commercial only to find nothing more than 19 seconds. I'll try to redo my talk this afternoon.
Wednesday, August 18, 2010
My Video Stream This Week
I will be posting a new talk this evening. I intend to explain how the combination of competition and new technological economies of scale overaccumulation, which led to both deindustrialization and financialization, which, in turn, led to the current crisis. I will start at 6:00 and will finish before 6:30.
http://www.ustream.tv/channel/unsettling-economics
How Big is the Federal Deficit?
Kevin G. Hall and Robert A. Rankin want us to be very worried about the Federal deficit:
OK, the nominal deficit for this year will be about 6 times the nominal deficit in 1986 but might we also point out that nominal GDP is about 3 times what it was almost 25 years ago?
The national debt is rising to levels that have never been seen in the United States during peacetime … This year's federal budget deficit alone is expected to close the fiscal year Sept. 30 in a range between a staggering $1.3 trillion and $1.42 trillion. That's about six times President Ronald Reagan's biggest deficit, and he was blasted as a dangerous budget-buster.
OK, the nominal deficit for this year will be about 6 times the nominal deficit in 1986 but might we also point out that nominal GDP is about 3 times what it was almost 25 years ago?
Tuesday, August 17, 2010
In Memoriam
One of the tallest trees in the forest of jazz has fallen: Abbey Lincoln passed away on Saturday. If you've never heard her, you must: you can see a magnificent performance of "First Song" (music, Charlie Haden; words, Abbey) on YouTube.
There are many recordings to choose from, but my own favorite is The World is Falling Down from 1990. Listen to her utterly distinctive version of "How High The Moon," from that album: you will never hear any other version again without comparing it unfavorably to this one. (Jackie McClean, whose sound on the alto sax seems to be what the word "keening" was invented to describe, is a brilliant accompanist here.) A close second is from early in her career, the album That's Him, featuring the saxophone colossus Sonny Rollins and Max Roach, Abbey's husband-to-be, on drums.
RIP, Abbey.
There are many recordings to choose from, but my own favorite is The World is Falling Down from 1990. Listen to her utterly distinctive version of "How High The Moon," from that album: you will never hear any other version again without comparing it unfavorably to this one. (Jackie McClean, whose sound on the alto sax seems to be what the word "keening" was invented to describe, is a brilliant accompanist here.) A close second is from early in her career, the album That's Him, featuring the saxophone colossus Sonny Rollins and Max Roach, Abbey's husband-to-be, on drums.
RIP, Abbey.
Why are some pharmaceuticals so expensive?
Brian Palmer tries to answer his question without ever writing the term patent protection. I find this amazing and I can’t wait for Dean Baker to address this piece. Mr. Palmer uses as an example the drug Avastin which costs $8000 for a month’s supply and writes:
The cost of manufacturing pharmaceuticals is often a small percentage of sales which is why they can be so profitable for their makers even though an extensive amount of money is often spent on promoting patented drugs. Mr. Palmer also dredges out this excuse:
Credit, however, goes to Mr. Palmer for at least emphasizing the lack of competition for certain drugs. It is true that this sector incurs substantial R&D expenses and the risk that the R&D may generate several dry holes. But do we really need a patent system in order to discover new treatments?
Manufacturing costs play a role in pricing decisions, although a small one. Avastin belongs to a category of drugs called biologics, which are large molecules that usually have to be manufactured by DNA manipulation. Biologics cost more to make than traditional drugs, which usually are generated through cheaper chemical reactions. Still, manufacturing costs normally don't exceed a few percentage points of sales revenue.
The cost of manufacturing pharmaceuticals is often a small percentage of sales which is why they can be so profitable for their makers even though an extensive amount of money is often spent on promoting patented drugs. Mr. Palmer also dredges out this excuse:
You hear a lot about how expensive it is to bring a drug to market.
Credit, however, goes to Mr. Palmer for at least emphasizing the lack of competition for certain drugs. It is true that this sector incurs substantial R&D expenses and the risk that the R&D may generate several dry holes. But do we really need a patent system in order to discover new treatments?
Harvey Friedman's Proposal For Public Refereeing Of Papers
An odd spinoff of the ongoing debate over at http://rjlipton.wordpress.com is a proposal that the genius logician Harvey Friedman (first taught as a prof at Stanford in philosophy at age 18, a world record for youthful professoring) has put forward in the middle of it for refereeing papers at journals, obviously inspired by the ongoing, now many hundreds of entries long, debate over the proposed proof by Vinay Deolalikar that P does not equal NP in computational complexity theory (current consensus: current proof flawed, but argument might still be right, or more likely, proof strategy may be very productive for lesser results).
So, the proposal is that an author is offered the option of public refereeing rather than the standard secretive double-blind type usually done. This public refereeing involves the journal putting the paper up on a website where anybody can publicly critique it. The author can respond and put up new revised versions (and can criticize the editorial board of the journal as well). When the author is satisfied with what has transpired out of the process, s/he can propose that the ed board consider it for publication. They then decide either to publish or not to publish. If it is not published, the last version can either remain up "hanging" on the website or be taken down.
So, the proposal is that an author is offered the option of public refereeing rather than the standard secretive double-blind type usually done. This public refereeing involves the journal putting the paper up on a website where anybody can publicly critique it. The author can respond and put up new revised versions (and can criticize the editorial board of the journal as well). When the author is satisfied with what has transpired out of the process, s/he can propose that the ed board consider it for publication. They then decide either to publish or not to publish. If it is not published, the last version can either remain up "hanging" on the website or be taken down.
Monday, August 16, 2010
Screwing Bondholders: Ending Bondage
The biased legal system lets bondholders make extortionate demands against workers, poor countries, .... President-elect Clinton learned how bond markets can even intimidate the government from exercising reasonable policies. So, with a bit of schadenfreude, I am glad to learn that Blackstone has the right to screw bondolders. Why should Blackstone have more rights than ordinary people? Why can't we organize to put some limits on the untrammeled power of financial markets, including that of Blackstone?
Here is the story:
Denning, Liam. 2010. "Blackstone Might Rewire Dynegy's Balance Sheet." Wall Street Journal (16 August).
http://online.wsj.com/article/SB10001424052748704868604575433722961359484.html?mod=WSJ_Markets_section_Heard
"It isn't often a 62% premium offers reason for grumbling. Blackstone Group's takeover offer for Dynegy effectively gives it two-thirds of the company's generation capacity plus cash for no money down. That is because NRG Energy has simultaneously agreed to buy about a third of Dynegy's megawatts for $1.36 billion, or about $800 million more than the price tag for Dynegy's equity."
"Why didn't Dynegy sell the assets to NRG and keep the money itself? Probably because it did this a year ago for no discernible gain. In August 2009, Dynegy sold about a quarter of its capacity to LS Power to boost liquidity. That didn't stop the stock dropping from about $10 then to less than $3 before Blackstone showed up.
If shareholders are miffed, it is Dynegy's bondholders that have real reason to worry. Should Blackstone decide to dividend the entire proceeds of the NRG deal back to itself, Dynegy will be left carrying its existing debt load on a smaller stream of profits. That would raise the company's already high credit risk. But then Blackstone, sitting on a potential $800 million instant profit and with no other shareholders to protect, need not worry too much about that."
"Alternatively, Blackstone could use some of that profit to buy in some of those bonds. Doing so would reduce Dynegy's debt burden and, possibly, its cash interest costs, potentially boosting Blackstone's return when it sells the company down the road. This likely would only make sense, however, if Blackstone bought the bonds below even today's market values of between 60 and 80 cents on the dollar. Shareholders might wish they got a higher premium. Bondholders may end up scrambling to limit their losses."
Here is the story:
Denning, Liam. 2010. "Blackstone Might Rewire Dynegy's Balance Sheet." Wall Street Journal (16 August).
http://online.wsj.com/article/SB10001424052748704868604575433722961359484.html?mod=WSJ_Markets_section_Heard
"It isn't often a 62% premium offers reason for grumbling. Blackstone Group's takeover offer for Dynegy effectively gives it two-thirds of the company's generation capacity plus cash for no money down. That is because NRG Energy has simultaneously agreed to buy about a third of Dynegy's megawatts for $1.36 billion, or about $800 million more than the price tag for Dynegy's equity."
"Why didn't Dynegy sell the assets to NRG and keep the money itself? Probably because it did this a year ago for no discernible gain. In August 2009, Dynegy sold about a quarter of its capacity to LS Power to boost liquidity. That didn't stop the stock dropping from about $10 then to less than $3 before Blackstone showed up.
If shareholders are miffed, it is Dynegy's bondholders that have real reason to worry. Should Blackstone decide to dividend the entire proceeds of the NRG deal back to itself, Dynegy will be left carrying its existing debt load on a smaller stream of profits. That would raise the company's already high credit risk. But then Blackstone, sitting on a potential $800 million instant profit and with no other shareholders to protect, need not worry too much about that."
"Alternatively, Blackstone could use some of that profit to buy in some of those bonds. Doing so would reduce Dynegy's debt burden and, possibly, its cash interest costs, potentially boosting Blackstone's return when it sells the company down the road. This likely would only make sense, however, if Blackstone bought the bonds below even today's market values of between 60 and 80 cents on the dollar. Shareholders might wish they got a higher premium. Bondholders may end up scrambling to limit their losses."
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