The Economist: Free exchange

Wayward on their carry concern?

Fri, 20 Nov 2009 19:12:42 +0000

What's really behind the deficit hawkishness?

MY WORKING theory of the Obama administration's recent deficit tough talk has been that the powers that be believe any new, deficit-funded stimulative measure would be impossible to get through Congress without some nod toward reining in the growing debt. Paul Krugman seems to have been hearing some things from people who know, and he says that's not it. The administration is worried about something else, and the deficit concern is real:[W]hat I hear is that officials don’t trust the demand for long-term government debt, because they see it as driven by a “carry trade”: financial players borrowing cheap money short-term, and using it to buy long-term bonds. They fear that the whole thing could evaporate if long-term rates start

A big Fed mess

Fri, 20 Nov 2009 15:49:40 +0000

Please stop patting Ben Bernanke on the back

ALAN BLINDER opens a new Washington Post column with what I believe is the conventional wisdom:The Federal Reserve's performance in this long-running financial and economic crisis deserves separate grades. For the early crisis period, from the summer of 2007 until a few weeks after the Lehman Brothers failure in mid-September 2008, the Fed's response was uneven. I would question several decisions. But the Fed deserves extremely high marks for its work since then. It has hit the bull's-eye regularly under very trying circumstances.In academia and in the financial markets, the overwhelming attitude is: Hurrah, and thank goodness, for Ben Bernanke, who gets kudos for his boldness, creativity and smarts. This is what economists seem to believe—that the Fed totally blew

Quote of the day

Fri, 20 Nov 2009 14:57:09 +0000

Would you take investment advice from this man?

WHEN last we checked in on Bill Gross, he was writing about, um, death, before telling us all that assets have way over-performed over the past 50 years. In his latest missive, by contrast, Mr Gross is merely rewriting history:My point is to recognize, and to hope that you recognize, that an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive. Like the American doughboys near France’s Maginot line in WWII – slumping day after day in a muddy, rat-infested pit – when the battalion commander finally blew his whistle to charge the enemy lines, it probably was accompanied by some sense of relief; anything, anything but this! Anything but .01%!The paragraph seems to

Beyond the peg

Fri, 20 Nov 2009 14:35:08 +0000

China's trade surplus is about more than exchange rates

IN JUST about any analysis of the persistent trade imbalance between China and America, China's currency policy is sure to feature as the principle villain. By pegging its currency to the dollar, China prevents dollar depreciation from playing its natural role in facilitating current account adjustments, making Chinese goods more expensive in America (and elsewhere) such that Americans import less and export more.But how much of the yawning trade gap can be attributed to currency manipulation. A new paper (PDF) by Yin-Wong Cheung, Econbrower's Menzie Chinn, and Eiji Fujii argues it's less than you think:Our bottom line conclusion regarding the estimated elasticities is that the real exchange rate effect on overall trade flows – using typical point estimates – is

Did the president save the auto industry?

Fri, 20 Nov 2009 13:58:50 +0000

An unlikely explanation for high auto prices

EARLIER this week, I pointed to a surprising increase in vehicle prices in the Consumer Price Index and noted that the rise seemed to be due to Cash for Clunkers, which depleted vehicle inventories. Prices were up because there were fewer cars on lots.The New York Times' Floyd Norris has a different explanation—prices have risen because the auto industry bail-out was a smashing success:Evidence of what is going on came this week in the consumer price figures for October. The index for new autos was up 1.6 percent for the month, and 3.8 percent for the last 12 months. It has been more than a decade since that index rose by nearly that much. That is what can happen when

Link exchange

Fri, 20 Nov 2009 01:44:20 +0000

The best of the rest of the economics web

TODAY'S recommended economics writing:• Metropolitan budgets are on the brink of catastrophe. (New Republic) • Income and poverty in American counties, nicely mapped. (Economix)• Basic background deficit math. (Brad DeLong) • Google invents a city, puts it on Google maps. (Telegraph) • The first president of the European Union is...Herman Van Rompuy. (Financial Times)

How to tackle a deficit

Thu, 19 Nov 2009 20:28:20 +0000

It will have to be done eventually; here's where to start

AMERICA has gotten itself into a funny place. Despite the large increase in its debt load associated with the Bush tax cuts, two significant wars, a deep recession, and large fiscal stimulus, the country has managed to avoid trouble with debt markets. There are few signs of a waning appetite for American debt, and neither are interest rates rising as a result of all the red ink.But because the long-term budget picture in America is one of steady growth in the deficit, the issue has resonance in American politics (despite the fact, generally acknowledged, that now is no time to be cutting spending or raising taxes). Looming over every policy debate are questions about deficit impacts. And so to earn

Outstanding graphics of the day

Thu, 19 Nov 2009 17:25:07 +0000

Of young health reform supporters and old empires

I PRESENT two outstanding graphical presentations of data, for your enjoyment. First, from the New York Times, a look at support for health care reform across two critical variables:And second, via Paul Kedrosky, a videographic on the (recent) history of empire:Bonus points for commenters who explain the connexions, fanciful or otherwise, between the two.

Food for thought

Thu, 19 Nov 2009 16:43:10 +0000

A warming globe is a hungrier one

THE amusing-yet-slightly-disturbing news of the day is that America is suffering a nationwide shortage of Eggo frozen waffles—a critical part of the diets of lazy breakfasters everywhere. The reason for the shortage? Production problems at key Kellogg facilities in Atlanta, Georgia, which are directly related to the epic flooding that recently plagued the area. That flooding has in turn been linked to a warming climate.All of which provides a nice segue for this Economist video, on the far more serious food issues which may develop as the earth heats up: These questions become particularly troubling when one considers the historical relationship between episodes of drought and famine and warfare, especially in sub-Saharan Africa.

Where will we be in one year?

Thu, 19 Nov 2009 15:39:22 +0000

Far from where we want to be

THE good news is, the OECD's latest economic forecast revises up sharply projected economic growth for member nations. The bad news is, that still leaves OECD economies in pretty dismal shape. The organisation is now projecting that OECD members will grow by 1.9% in 2010, up from an earlier 0.7% forecast. The OECD estimates that the American economy will expand by 2.5% next year, where earlier 0.9% growth was anticipated.It's nice that expectations have risen, but we had all better hope that they rise more. In the two years after the end of the 1982 recession, the American economy expanded by 4.5% (1983) and 7.2% (1984), and at the end of that period the American unemployment rate was still above

Out of running room

Thu, 19 Nov 2009 14:53:18 +0000

Free exchange is trying to help find a better macro policy

I THINK Brad DeLong misread this post of mine from yesterday as a shot at him. It wasn't. I agree with him that the constraints which seem to be draping themselves across American policy options are worrisome. I was more focused on those who seized on his earlier post, on how the whole AIG mess has likely soured the American public on big interventions, as a reason to refight old battles about the coddling of banksters. Those responses struck me as off base and unhelpful.Mr DeLong writes:If Free Exchange wants to ignore the fact that we are now out of macroeconomic running room, they are of course free to do so. But it might be more constructive for Free Exchange

Still in suspense

Thu, 19 Nov 2009 14:25:53 +0000

A half million seeking unemployment benefits each week

IT SEEMS a little silly to report on weekly jobless claims figures for a week in which there was no change in the number, but I've been following this statistic for so long now that I feel obliged to update you. So here's the scoop: last week, claims were the same as they were the week before—505,000. The four-week moving average fell to 514,000. Bloomberg suggests the above is "a sign firings are letting up as the economy recovers". If they say so.

Link exchange

Wed, 18 Nov 2009 22:16:32 +0000

The best of the rest of the economics web

TODAY'S recommended economics writing:• Say's Law in China—is it really so crazy to build a big empty city? (Scott Sumner) • Economists on some key principles for health care legislation (but why'd they send the letter to the president?). (Economix) • Mapping the world's great value disputes. (Robin Hanson) • Two comments on Depressions, concerning fiscal and monetary policy, and uncertainty. (Vox) • "In 1740 Smith was awarded a Snell Scholarship (which is still in existence today) to study at Balliol College, Oxford. Smith preferred Glasgow, however, because Oxford’s curriculum was antiquated and he thought the teachers were lazy since, in contrast to Glasgow, their salary did not depend on the number of students taught." (University of Glasgow, via Gavin

Hindsight is occasionally blurry

Wed, 18 Nov 2009 18:40:57 +0000

People forgetting how bad things were last fall

BRAD DELONG got himself a lot of links yesterday by writing that efforts to save the banking industry last fall, by eroding public trust in government, increased the odds of a replay of the Great Depression from virtually nothing to 5%. Paul Krugman takes it from there:Brad DeLong says that the loss of public trust due to the kid-gloves treatment of bankers has raised the probability of another Great Depression, because the public won’t support another round of bailouts even if it becomes desperately necessary. I agree — but I think the bigger cost is that we’ve greatly increased the chance of a Japanese-style lost decade, with I would now give roughly even odds of happening. Why? Because bank-friendly policies

Get tough with China how?

Wed, 18 Nov 2009 17:21:28 +0000

Pundits desperately want some ineffectual tough talk

TODAY, it's Martin Wolf's turn to write this column:This, then, was an opportunity for Mr Obama to tell some brutal truths. I hope he did, after careful briefing from his staff, on the following lines...The policy China apparently recommends to us would not even work on its own terms. Suppose the Fed stopped quantitative easing and raised interest rates, to strengthen the dollar, while we pushed through a huge fiscal tightening. This would return the economy into a slump. Thereupon the fiscal deficits would surely worsen, once again...At a time of such weak global demand, yours is a ‘beggar thy neighbour’ policy. You complain about the protectionist actions I have implemented. But their impact will be trivial compared with China’s