Thursday, September 27, 2012

Fed's Plosser is Worried QE3 Might Work

Via Matt Yglesias:
QE 3 skeptic and Philadelphia Federal Reserve President Charles Plosser gave a very strange speech outlining his opposition to monetary stimulus which I think can best be summarized as starting with concerns that it won't work and ending with dire warnings that it might work. Perhaps the strangest part comes when he warns that aggressive monetary stimulus in today's era might lead to consequences similar to those seen in the mid-1930s, when FDR's stimulative monetary policies broke the back of the Great Depression:
With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales. Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation.
This is, I think, totally accurate. In 1933, the Roosevelt administration and the Federal Reserve began a program of aggressive monetary stimulus. This worked really well and loan growth was quite rapid. Indeed, the economy in general grew at a furious pace for about four years as idle resources were put back to use. But there was no immaculate growth and the rapid expansion was somewhat inflationary. And then in 1937 policymakers felt they had to counter these trends and implemented contractionary policies. Indeed, in their fear they went too far and produced an unfortunate recession-within-the-depression."
For those of you who wanted to see a graph of Plosser's dreaded 30's recovery, here's real GDP growth:

And here's inflation during that same exact period:

Not seeing anything catastrophically inflationary there, are you? In fact, the inflation that the U.S. did get was critical in fostering the robust growth that we saw during the mid-30s, since it worked to end debt deflation, etc. In any case, I'm short on time and Matt said everything that I would have said, but better, so I'll leave it at that.

Wednesday, September 26, 2012

This Could Get Ugly, Eurozone Edition

Well, here we are again folks, mere weeks after European Central Bank President Mario Draghi announced an unlimited bond-buying program, rioting has erupted across Spain and Greece over the drastic austerity programs that have been forced upon those countries. Ever since I started studying economics, I've come to realize what a clumsy contraption the Eurozone really is, with monetary policy being determined  for a myriad of very economically diverse nations by one central bank. On top of that, it lacks fiscal unity because, at the end of the day, nationalism still is still fashionable. 

As plenty of people have said before, the crisis in Europe isn't really about debt, when you get right down to it. As Brad Plumer aptly noted in a post today:
"In a country with 24 percent unemployment, those measures are already inciting protests and labor unrest. And now it turns out, according to reports from Germany, that those austerity measures won’t even be enough, because Greece’s economy is hurting so badly that its deficit keeps swelling anyway.

The same goes for Spain, where thousands of protesters have surrounded the parliament building in Madrid, incensed at perpetual budget cuts and tax hikes that never seem to get the country on pace for recovery. Ditto for Portugal, which has been the star poster child for austerity and yet keeps getting choked by poor growth and widening deficits."
Therein lies the rub: The more austerity these nations undertake, the more depressed their economies get, the more anxious the bond markets get about loaning money to them, the larger their deficits get, leading to more cuts in a vicious cycle. Ultimately, the problem isn't one of deficits. Yes, the PIIGS countries will have to get their budgets under control, but they're not going to be able to do that until they've recovered, which they can't do because they're so uncompetitive. 

What I mean by this is that these countries have high labor costs--that is, the costs of employing people in a business there have become wildly more expensive than in, say, Germany. For you visual learners, here's a chart I pulled from Krugman:

Anyway, the point I'm getting to is that countries usually can get around this problem easily--they just devalue their currencies, so that it gets cheaper to do business there. A notable example of this would be Iceland, which sharply devalued its currency and is now experiencing a robust recovery. The only way for the Eurozone to achieve something like this would be for the ECB to pursue a higher rate of inflation, such that Southern Europe's labor costs get back into line with Germany's. 

The Germans, of course, have an almost paralyzing fear of inflation, one which brings up images of wheelbarrows full of cash being used to buy bread, as well as the rise of Hitler and the Nazi Party. While the bit about wheelbarrows is true, the fact is that hyperinflation had little to do with the Nazi Party's rise to power. Hyperinflation ended in 1924 in Germany, and Hitler wasn't sworn in as Chancellor until January of 1933. Might there have been something happening during those nine years? Something of the "Great Depression" variety? Via Clayton White:
"Inflationary finance did not bring about the Nazis; mass unemployment did. Crushing debt burdens owed to foreigners did. Foreign mandates imposed in a beleaguered population did. THAT'S the kind of environment that leads to radical leaders whose messages of spite and hatred can take root."
Between 1924 and 1929, the German economy was pretty prosperous, by the way. So Germany ought to get its facts straight, lest the rest of Europe pay an even higher price just because the members of the Bundestag didn't pay much attention in history class. 

Monday, September 24, 2012

Emergency Room Visits Aren't the Same As Being Insured

Via Sarah Kliff over at Wonkblog, I learned that Mitt Romney, in an interview with 60 Minutes, suggested that the uninsured could obtain health care in the emergency rooms, where most hospitals, per federal law, are required to provide care regardless of ability to pay. Romney is right that people can get care in emergency rooms no matter how poor they may be, but I think his statement misses the point--it isn't whether or not uninsured people can get care, it's whether or not this is the best or most efficient way to provide care. I don't think that it is, and Romney didn't either just a few years ago.

Visiting the emergency room for non-urgent reasons is enormously inefficient. Experts estimate that visiting the ER for treatment of a non-urgent condition is two to five times more expensive than visiting a primary care doctor with the same symptoms. That makes perfect sense, doesn't it? I mean, imagine that you had a bad case of the flu and you were taken to the ER. Doesn't it seem that a primary care doctor could just as easily take care of you, without all of the added costs of ER care? 

I know this is nothing really new to those of you who read my blog regularly, but it always is good to remind people that just because you can get "free" care in an ER, doesn't mean that the uninsured wouldn't be better off without health insurance. Romney, to his credit, once realized this. Not anymore, unfortunately. Using the ER for everyday health care is, in my view, sort of like driving a Land Rover on a well-paved road--you can do it and it'll probably work, but a Honda Civic can do it just as well, and for a lot less money.

Monday, September 17, 2012

Meet the New GOP Economic Plan, Same as the Old Plan

One of the things I frequently think about when I hear the GOP's economic policies is, "Hmm, this looks familiar." As a result, I've always thought that the GOP's current economic platform, rather than being a product of our current economic circumstance, actually reflects the same generic platitudes that they have been advocating for since 2004. I've never specifically looked into how well their talking points lined up over the years, but thanks to Mike Konczal, I don't have to dig too deeply. He's written a post that includes economic talking points from 2004, 2008, and 2012 Republican Conventions. Here are the five big points in Romney's economic platform, as heard during his speech at the RNC this past month:
  • First, by 2020, North America will be energy independent by taking full advantage of our oil and coal and gas and nuclear and renewables.
  • Second, we will give our fellow citizens the skills they need for the jobs of today and the careers of tomorrow. When it comes to the school your child will attend, every parent should have a choice, and every child should have a chance.
  • Third, we will make trade work for America by forging new trade agreements. And when nations cheat in trade, there will be unmistakable consequences.
  • Fourth, to assure every entrepreneur and every job creator that their investments in America will not vanish as have those in Greece, we will cut the deficit and put America on track to a balanced budget.
  • And fifth, we will champion SMALL businesses, America’s engine of job growth. That means reducing taxes on business, not raising them. It means simplifying and modernizing the regulations that hurt small business the most. And it means that we must rein in the skyrocketing cost of healthcare by repealing and replacing Obamacare.
So, to sum these five points up, energy independence, better education through school choice, free trade, cutting spending/balancing the budget, and reducing taxes and regulations on businesses. Let's compare these points to  quotes in McCain's speech in 2008, given on the eve of the financial crisis, when unemployment stood at 6.1%:
  • I will open new markets to our goods and services. My opponent will close them.
  • I will cut government spending. He [Obama] will increase it.
  • We all know that keeping taxes low helps small businesses grow and create new jobs.
  • Reducing government spending and getting rid of failed programs will let you keep more of your own money to save, spend, and invest as you see fit.
  • We need to shake up failed school bureaucracies with competition, empower parents with choice.
  • We'll produce more energy at home.. Senator Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that.
So in 2008 the GOP's platform is free trade, cutting government spending, cutting taxes on businesses, school choice, and energy independence. This platform looks pretty familiar, but maybe it changes if we go back another four years, to when the economy isn't right on the cusp of a major recession. Perhaps the platforms were similar because both elections took place in or around a recession. Maybe Bush's speech in 2004 will show an economic platform that changes based on the state of the economy? As a reminder, when Bush gave his speech in 2004, unemployment was at 5.4%, which is basically "full employment." Anyway, here are some excerpts:
  • To create jobs, my plan will encourage investment and expansion by restraining federal spending, reducing regulation and making the tax relief permanent.
  • To create jobs, we will make our country less dependent on foreign sources of energy.
  • To create jobs, we will expand trade and level the playing field to sell American goods and services across the globe.
  • And we must protect small-business owners and workers from the explosion of frivolous lawsuits that threaten jobs across our country. Another drag on our economy is the current tax code, which is a complicated mess.
  • He's [John Kerry] proposed more than $2 trillion in new federal spending so far, and that's a lot, even for a senator from Massachusetts.
So, cutting regulations, expanding free trade, cutting taxes, and cutting federal spending. The only thing that was left out of the 2004 economic platform was school choice, presumably because Bush's signature education policy was No Child Left Behind, which was geared more towards public schools. In any case, I'm assuming that many of you picked up on a pattern here: the GOP's economic platform has been virtually the same since 2004, regardless of economic conditions. That is, rain or shine, recession or full employment, the GOP's economic platform has remained some iteration of the same few talking points for the past 8 years. Regardless of what you think about the performance of the so-called Bush economy, the idea that economic conditions in 2004 are comparable to those of today is utterly insane. 

This quote by Stephen Colbert sums things up nicely: "He believes the same thing Wednesday that he believed on Monday, no matter what happened Tuesday. Events can change; this man's beliefs never will."

Wednesday, September 12, 2012

Who Cares What Ratings Agencies Say?

Fairly quick post today, I just wanted to make a point about ratings agencies. It always seems popular for commentators and pundits to crow about the importance of a nation's credit rating, as determined by the three ratings agencies. Well, I may be among the minority here, but I personally don't care what the ratings agencies say. It just doesn't matter very much. 

Let me be clear, when I say that a rating change doesn't matter, I mean that it won't change a nation's creditworthiness. To be sure, when S & P downgraded the United States in 2011, a lot of things happened, most notably among them being a large decline in the stock market. But, if you'll all recall, a sovereign credit rating is intended to describe the riskiness of a nation's debt. The riskiness of a nation's debt is represented by its borrowing costs, that is, the lower the interest it pays on its debt, the less risky a nation's debt is seen to be by credit markets. In the U.S. right now, we pay 1.625% interest on a ten-year bond. Those are historic lows.

Now, when S&P announced their big credit downgrade on August 5, 2011, here's what happened to Treasury yields (borrowing costs) over the next month:

Yields plummeted. So investors saw U.S. debt as less risky, not more. S&P really is the prognosticator of prognosticators.

There are those of you who might say that the Fed is buying up our debt, and that's why interest rates remain so low for the U.S. Well, that's demonstrably false. By that logic, interest rates would spike if the Fed stopped buying bonds up, right? Well, lucky for me, they did just that in 2011. Here's what happened:

Yields stayed low regardless. So I don't think the Fed has a lot to do with it, to be honest. But back to the ratings agencies.

Now, the ultimate unimportance of the 2011 downgrade isn't the only reason I don't much care what the ratings agencies say. They already have a reputation for shoddy work, as they proved a mere four years ago. You see, I am of the view that the financial crisis, in large part, would not have happened if not for the ratings agencies. They told the world that mortgage-backed securities were AAA-rated, when in fact there is every indication that they knew the assets were complete trash. Had they been rated appropriately, no one would have bought them. Crisis averted. 

In any case, the only thing that brought this tirade up was the fact that I saw this article, in which Moody's is apparently threatening a U.S. credit downgrade. I'm not the type who usually makes predictions, but I'm calling it right now: if the U.S. credit rating is downgraded by Moody's, our borrowing costs likely won't go up. 

Sunday, September 9, 2012

Obama's Reckless Spending/Cutting is Helping/Hurting the Economy

Government spending destroys jobs, except when it creates them:

Criticizing Obama for spending too much and for cutting too much? I think Romney/Ryan are trying to have their cake and eat it too. And just in case any of you have forgotten the point I've made many times, government employment is down under Obama:

The x-axis is months since inauguration, the y-axis is thousands of jobs (i.e. -1000 is a loss of one thousand thousand, or one million)

The spike under Obama is hiring for the Census in 2010

But is anyone that is in favor of smaller government lauding Obama for his dramatic reduction in public-sector employment? Not a chance. Instead, they're claiming government employment is way up, in stark contrast to the facts. At the same time, members of the GOP are lamenting the jobs threatened by budget cuts. Budget cuts, if you'll recall, that they insisted upon making in return for raising the debt ceiling.

Tuesday, September 4, 2012

You Have No Power Here, China Investment Corp

I realize I'm a bit late to the game on this (real life intervened, as it so often does), but in his speech at the Tampa convention last week, Rob Portman threw out a doozy of a line:
"Take trade with China. China manipulates its currency, giving it an unfair trade advantage. So why doesn't the President do something about it? I'll tell you one reason, President Obama could not run up his record trillion dollar deficits if the Chinese did not buy our bonds to finance them."
Let's take this claim from the top. First of all, let's look at U.S. borrowing from abroad over  the past several years. As Paul Krugman notes, it is, in fact, way down:

You'll note that the scale on the y-axis is negative. In any case, the reason borrowing from abroad is way down is because the private sector in the U.S. is paying down the massive amounts of debt it accrued in the 2000s. What do people do when they save more and spend less? Well, they buy assets with their savings. Assets like United States Treasury Bills. So most of our debt right now is being financed not by China, but by U.S. citizens saving more of their money.

Now then, back to the whole "currency manipulation" business. Rob Portman is right about one thing: we should have done something about China's currency manipulation. It is, however, a bit late for that, since China hasn't manipulated its currency in over a year. But humor me for a few minutes and assume that they'll start doing it again. I suppose we'd need to actually know what currency manipulation entails first, before going into more detail, so here we go. Exchange rates are determined on the foreign exchange markets. Basically, what China does to keep its currency cheaper in terms of U.S. dollars is that it buys lots and lots of dollar-denominated assets. As such, demand for these assets, and thus the currency they are denominated in, rises, which drives the value of that currency upwards. As a result of this, the Chinese Renminbi drops in value, while the U.S. dollar strengthens, comparatively.

All of this brings me back to the oft-uttered conventional wisdom that "China lending trillions to the U.S. gives them power over us!!" No, not right now it doesn't. First of all, they're parking tons of their money in assets that give them virtually nothing back. Kind of a poor decision on their part, but there it is. Anyways, the bigger reason is this: all that would happen if China stopped buying our treasury bills and instead bought other currencies is that the dollar would become weaker. And that would be a good thing. 

Think of it this way: if the dollar is weaker on the world stage, American-made goods (which are bought in dollars!) are relatively cheaper than, say, Chinese goods (or European, or whatever). So the end result would be that, in having a weaker dollar, we'd sell more goods overseas via trade. Thus, firms in the U.S. would see increased demand for their goods and would produce more, hire more, etc, etc. In effect, this would be a form of economic stimulus.

Basically where the conventional wisdom sort of goes off the rails is the part where people fear what will happen if we get "tough on China" for manipulating their currency. Most people think that we need the Chinese to finance our deficits, and by getting tough on them, they'll cut us off, making it that much more difficult for us to borrow money. But the fact is that if China dumped all of their U.S. Treasury holdings right now, they'd be doing us a huge favor. Not to mention the fact that they'd be shooting themselves in the foot.

So, in the words of Clint "Argues-With-Chairs" Eastwood, go ahead, China, make my day.