The Economist: Free exchange

Not much too much

Tue, 10 Nov 2009 20:16:23 +0000

Is China building itself into excess capacity purgatory?

TYLER COWEN is worried about excess capacity in China. He quotes the Wall Street Journal: Most of China's growth this year has been unsustainable, driven by stimulus. China's money supply has risen 29% in the past year. At the government's behest, banks have increased their lending by nearly $1.4 trillion, or 32%, during that time. That flood of borrowed cash has been channeled into new infrastructure and production capacity. These investments will account for up to half of China's gross domestic product this year, according to some estimates. A key question is whether China needs all of this investment. Analysts at the London hedge fund Pivot Capital Management say that China already has enough idle steel-production capacity, for example, to

Chart of the day

Tue, 10 Nov 2009 19:56:57 +0000

Markets shine on American exporters

PAUL KEDROSKY titles the post containing this chart, "Dying Dollar Dings Exporters? Not So Much." But of course, that American exporters would benefit froma falling dollar is exactly what we'd expect to happen.Note that this is based on share performance. Presumably, anticipation of better future profits translates at some point into greater sales and employment, but the correlation is unlikely to be perfect.

Bubble fear

Tue, 10 Nov 2009 18:56:12 +0000

An irrationally exuberant pathology

ONE of the reasons St. Louis Fed president Jim Bullard is more anxious than others to rein in Federal Reserve activity is a concern that leaving policy too loose for very long will lead to inflation of new asset bubbles. Should we be worried about this?Not really, according to former Fed governor Frederic Mishkin. He writes that bubbles seem to come in two flavours: your standard irrational exuberance bubble, and a variant in which rising asset prices lead to increased leverage which further boosts prices, in an ongoing feedback loop. The tech stock boom would be an example of the former; its popping led to some economic displacement and a recession, but did not precipitate paralysis in financial markets. The

When news isn't news

Tue, 10 Nov 2009 15:15:51 +0000

Markets are well aware of how little oil is out there

The Guardian had a blockbuster scoop on the state of global oil production yesterday:The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help

What are these Fed presidents up to?

Tue, 10 Nov 2009 14:26:43 +0000

Fed official surprisingly bullish on employment

THE Financial Times' Krishna Guha writes up some additional takeaways from his interview with St. Louis Fed president Jim Bullard, who recently said he believed that inflation uncertainty was as high as it has been since 1980.Bullard has an above-consensus forecast for growth in 2010 and sees unemployment as likely to come down by roughly a point and a half from its peak over the rest of the year - putting it in the 8.5 per cent to 9 per cent range at year end...He thinks the Fed should wait for solid monthly job gains and a decline in the unemployment rate before starting to tighten policy - but that it need not wait for unemployment forecasts to converge to their natural rate.

Link exchange

Mon, 09 Nov 2009 22:21:49 +0000

The best of the rest of the economics web

TODAY'S recommended economics writing:• On the placebo effect and decaffeinated coffee. (Neuroskeptic, via Marginal Revolution) • Scott Sumner clarifies his thoughts on expected inflation and nominal GDP. (Scott Sumner) • "Though climate change is a grave problem, Levitt and Dubner treat it mainly as an opportunity to show how clever they are." Or aren't, as the case may be. (New Yorker)• Why do senators filibuster? (The Monkey Cage) • Buttonwood is spot on in his point about ridiculous Bloomberg headlines. Right now I'm struggling with, "Leipzig Becomes Most Modern Making BMWs in Back to Future Since Wall Fell." Really, that's a headline. (Buttonwood) • "If you paid a $4 poll tax in 1910, your great-grandchild gets a polio vaccine today."

The market rate of obesity

Mon, 09 Nov 2009 18:53:57 +0000

Falling wages mean more empty calories

SPEAKING of unintended consequences from above market wage rates, have a look at this (via Greg Mankiw):Growing consumption of increasingly less expensive food, and especially “fast food”, has been cited as a potential cause of increasing rate of obesity in the United States over the past several decades. Because the real minimum wage in the United States has declined by as much as half over 1968-2007 and because minimum wage labor is a major contributor to the cost of food away from home we hypothesized that changes in the minimum wage would be associated with changes in bodyweight over this period. To examine this, we use data from the Behavioral Risk Factor Surveillance System from 1984-2006 to test whether variation

It's hard to come together

Mon, 09 Nov 2009 16:42:30 +0000

Sovereignty has strange effects on economic development

GAVIN WRIGHT tells the interesting story of the belated economic revolution in the American south in one of my favourite economic history papers. In the years between the end of the Civil War and the Great Depression, the south was essentially a nation apart. There was next to no labour market overlap between the south and the rest of the nation, and while there was east-west convergence along a range of variables both in and out of the south, there was little to none between the south and the rest of the economy. Where much of the American economy was geared toward serving the massive American domestic market, the south focused overwhelmingly on labour-intensive commodity exports.What broke the south's isolation?

Pop quiz

Mon, 09 Nov 2009 15:45:07 +0000

Nothing highlights social chasms like recession

THE New York Times has an excellent interactive graphic displaying unemployment rates and trends in America by age, race, and education level. Here's a question for you: what is the current unemployment rate among black men, aged 15 to 24, without a high school degree. The answer is below the fold.Like Alex Tabarrok, I am a white male, between the age of 25 and 44, with a college degree, which means that I am part of a demographic group with one of the lowest unemployment rates (3.9%). The only groups with lower rates are white women between 25 and 44 with a college degree and white women 44 and older with a college degree. White male college graduates over 44

Quote of the day

Mon, 09 Nov 2009 15:05:45 +0000

At the end of the month, when the money runs out

FROM the New York Times:“There are families not eating at the end of the month,” said Stephen Quinn, executive vice president and chief marketing officer at Wal-Mart Stores, and “literally lining up at midnight” at Wal-Mart stores waiting to buy food when paychecks or government checks land in their accounts.At times like this I like to reflect on Casey Mulligan's argument that unemployment is high because workers don't want to work. If we got rid of those government cheques and workers had to go weeks rather than days without eating, I'll bet they'd quit their lying around and find a job!

What are these Fed presidents up to?

Mon, 09 Nov 2009 14:34:22 +0000

A continuing series

ONE month ago, after Federal Reserve officials issued a series of contradictory statements, I asked: "What are these Fed presidents up to?" We may have a continuing series on our hands. According to the Financial Times, St. Louis Fed president James Bullard is saying that uncertainty over the nation's inflation outlook is as high as it has been since 1980. But as I noted on Saturday, the Cleveland Fed just issued a new commentary arguing that that's not true at all. Rather:[T]he model indicates low rates, and stable inflation expectations...our model provides some evidence that inflation is not expected to increase, as longer-term inflation expectations remain near historic lows, in the neighborhood of 2 percent. Furthermore, the low inflation-risk premium

More accountability please

Mon, 09 Nov 2009 14:08:19 +0000

Forget whether it works, how much does it cost?

VIA Felix Salmon, here's an interesting look at the TSA (the folks who make you take your shoes off at airports) from the Government Accountability Office:TSA lacks assurance that its investments in screening technologies address the highest priority security needs at airport passenger checkpoints. Since TSA’s creation, 10 passenger screening technologies have been in various phases of research, development, test and evaluation, procurement, and deployment, but TSA has not deployed any of these technologies to airports nationwide… Deployment has been initiated for four technologies–the ETP in January 2006, and the advanced technology systems, a cast and prosthesis scanner, and a bottled liquids scanner in 2008… in the case of the ETP, although TSA tested earlier models, the models ultimately chosen

Cash for Clunkers datapoint of the day

Mon, 09 Nov 2009 13:53:57 +0000

Meet the new truck, same as the old truck

SOMETIMES when you try to kill two birds with one stone, you miss both birds and break your neighbour's window. Here's a look at how Cash for Clunkers fared at getting greener vehicles on the road: The most common deals swapped old Ford or Chevrolet pickup trucks for new pickups that got “only marginally better gas mileage,” the analysis found. Old Ford F-150 for new Ford F-150 was the most common exchange. Buyers were 17 times more likely to purchase an F-150 (rated at 16 miles per gallon) than a hybrid Toyota Prius.At least 15 owners of large pickups cashed them in for new Hummer H3 SUVs that get only 16 mpg. Excuse me, but why did the government even

Green eggs and chickens

Sat, 07 Nov 2009 19:01:49 +0000

Can you make a dirty state embrace green legislation?

LAST week, Brookings scholars published the results of an effort to calculate the average expected cost of a climate change bill by metropolitan area. The authors noted that lower emission reduction costs tended to be found in the districts of legislators favouring the bill, suggesting that the magnitude of expected costs to constituents was influencing lawmaker behaviour. Others disagreed with this conclusion, however, and so Brookings' Mark Muro and Jonathan Rockwell tested their hypothesis, generating this result: The lower the emissions, the more likely a yes vote. But does this establish causation? No, although it's certainly suggestive. But in fact both the emissions level and the vote could be determined by something else, namely, the extent to which constituents care

The heedless Fed

Sat, 07 Nov 2009 18:44:47 +0000

Pretty please, can we have some inflation?

YESTERDAY, I linked to a Paul Krugman post in which he links to an old piece of analysis he wrote on the Japanese economy in 1998, in which he says:To preview the conclusions briefly: in a country with poor long-run growth prospects - for example, because of unfavorable demographic trends - the short-term real interest rate that would be needed to match saving and investment may well be negative; since nominal interest rates cannot be negative, the country therefore "needs" expected inflation. If prices were perfectly flexible, the economy would get the inflation it needs, regardless of monetary policy - if necessary by deflating now so that prices can rise in the future. But if current prices are not downwardly