‘Bubble’ Revisionism
The WSJ previews forthcoming research re-evaluating the so-called tech bubble of the 1990s:
The traditional history of the dot-com bubble has been told many times: Too many companies rushed into the market in defiance of all known business fundamentals, and when the crash came, all but a tiny fraction of them just as quickly imploded and went away.
That received wisdom, though, is now getting a going-over by economists, business historians and others, some of whom are coming to new conclusions about what precisely went wrong during the bubble years, normally dated from the Netscape IPO in August 1995 to March 2000, when Nasdaq peaked at above 5100.
A recent paper suggests that rather than having too many entrants, the period of the Web bubble may have had too few; at least, too few of the right kind.
And while most people recall the colossal flops of the period (Webvan, pets.com, etoys and the rest) the survival rates of the era’s companies turns out to be on a par, if not slightly higher, than those in several other major industries in their formative years.
The paper is being published in a coming issue of the Journal of Financial Economics. As noteworthy as the findings are, even more interesting is the process that led to them. The work is an outgrowth of the Business Plan Archive at the University of Maryland. Its goal is to become a kind of Smithsonian Institution of the Internet bubble, saving for posterity every business plan, PowerPoint presentation and venture-capital term sheet—the more frothy and half-baked, the better—that it can get its hands on….
The study suggests, though, that the dimensions of that crash might be misunderstood. Nearly half of the companies they studied were still in business in 2004. Prof. Kirsch says that most people believe just a few percent made it through.
The study found that the attrition rate for dot-com companies was roughly 20% a year, which is no different from what occurred during many other industries, such as automobiles, during their early boom periods.
posted on 09 November 2006 by skirchner in Economics, Financial Markets
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Economic Policy at Full Employment
The RBA is widely expected to raise the official cash rate to 6.25% at next week’s Board meeting, equalling the previous cycle peak from August 2000-February 2001. In his first speech as RBA Governor, Glenn Stevens argued that the weakness in headline GDP growth did not square with the continued strength in the labour market and growth in tax revenue. At the same time, the combination of employment and growth outcomes implies that productivity growth has been non-existent since the end of 2003. While Stevens presented this as something of a puzzle and questioned the reliability of the data, he also spelled out the implications of taking the data at face value:
if both sets of data are correct, then productivity actually has slowed down considerably. But if that is true, unless it is a temporary phenomenon, then potential GDP growth is not 3 per cent or a bit above any more. It will be less, and our growth aspirations would have to be adjusted accordingly. In this scenario, inflation pressure in the near term could well increase and demand growth may need to be further restrained for inflation to remain under control over time.
Stevens argued that inflation outcomes provide a ready test of whether the economy is really growing below potential:
In trying to assess which of these possibilities, or which combination of them, is in operation, one of the pieces of evidence to which we will be looking for guidance is the behaviour of prices themselves. An economy with genuinely sub-potential growth over two years ought, other things equal, to start putting some downward pressure on inflation fairly soon. An inflation rate that continued to increase, on the other hand, would presumably raise questions about either the apparent rate of growth of demand and output, or of potential output or both.
It took a recession in the US to de-rail the last RBA tightening cycle. But the recent slowing of growth in the US is unlikely to alleviate domestic capacity constraints. After 15 years of continuous expansion, even modest domestic growth has the capacity to put upward pressure on inflation. This could well see the RBA having to maintain tighter policy settings than in the previous interest rate cycle.
Treasury Secretary Henry also considers the implications of an economy operating at capacity:
There are three important consequences of a near full employment economy that are worth emphasising. First, provided growing businesses are not being subsidised in any way, we can be confident that any consequent reallocation of labour in their favour increases GDP. On the other hand, if growing businesses are being subsidised, or if governments step in to prevent other businesses from shrinking, then GDP is lowered by their command of the nation’s scarce labour. Second, government activity that doesn’t expand supply capacity necessarily crowds out private sector activity. This crowding out represents the opportunity cost of the government’s having command of some part of the nation’s scarce resources, including labour. And third, any attempt to inhibit an allocation of the economy’s factors of production consistent with its terms-of-trade must have adverse implications for GDP.
posted on 03 November 2006 by skirchner in Economics
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Doomsday Cultists Suffering for their Beliefs
Regular readers will know that we are not averse to indulging in a bit of Schadenfreude over the foreign exchange losses of those who ‘robotically trash the US dollar’ (as Singapore fund manager Dr V put it when he first wrote about macroeconomic anti-Americanism as a kind of doomsday cult).
Schadenfreude is rather more warranted in the case of Bob Rubin, who as US Treasury Secretary presided over an incredibly expensive episode of regulatory capture of international economic policy by institutional investors. According to David Leonhardt, the one-time architect of the ‘strong dollar policy’ lost USD one million on his own account taking on non-USD exposures. Still, the market is a great teacher and Rubin now seems to take a more agnostic view:
“I think I was right, probabilistically,” he said recently, sitting in his Citigroup office overlooking Park Avenue. “But I don’t know. I really don’t. I don’t think anyone does. It’s also possible that none of this could happen. It’s possible that for reasons none of us can see that this will work itself out in a very copacetic way.”
posted on 02 November 2006 by skirchner in Economics
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Twenty Quid of Adam Smith
Bank of England Governor Mervyn King uses the occasion of the Adam Smith Lecture to announce that Adam Smith will feature on the BoE’s new twenty pound note:
From the division of labour in the pin factory to the need for our mutual “sympathy” to be embodied in carefully designed institutions, Smith’s writing is remarkable by its comprehensive and eclectic examination of ideas and facts. So it is appropriate that tonight here in Kirkcaldy, where Adam Smith found contentment in study and reflection, I can announce that tomorrow the Bank of England will reveal its new £20 note. And the figure celebrated on the new note will, of course, be Adam Smith - the first economist and the first Scotsman to appear on a Bank of England note.
From next spring, when visitors to our country look carefully at their new £20 notes, they will be able to see an engraving showing the division of labour in pin manufacturing with the words “and the great increase in the quantity of work that results”. I hope they will absorb the lesson that specialisation in production and trade across the world are the way to improve living standards in all countries – rich and poor alike. And perhaps when they return home they will press their own politicians to support the opening up of trade which has been at the heart of the British Government’s efforts to reform the world economy.
posted on 30 October 2006 by skirchner in Economics
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Alan Reynolds on Income and Wealth
Alan Reynolds, who often gets a favourable mention on these pages, has a new book out, Income and Wealth:
This volume explains the dynamics of income generation, how it is measured, and how such dramatic disparities in distribution come about. Citing numerous cases of distortion in the popular press, and among academics, policymakers, and pundits, Reynolds exposes many popular myths concerning income and wealth, and presents a balanced perspective on this critical aspect of economics and social policy. The book first defines various characteristics of income, with an emphasis on the gap between the rich and the poor, and reviews several theories to explain the disparities. Subsequent chapters focus on such timely topics as the “vanishing” middle class and the sky-high salaries of CEOs, Hollywood stars, and athletes. The final chapters consider the implications of policies, such as the minimum wage, taxes, immigration, and trade quotas, and expand the discussion to consider international comparisons. Featuring graphs and charts, a glossary of key terms, and a listing of references and resources, Income and Wealth explains the intricate, and often controversial, effects of economic policies on individuals, families, and communities. Moreover, it demonstrates how the numbers can be manipulated by policymakers, pundits, journalists, and academics to promote various agendas, and shows readers how to recognize hyperbole and make better-informed decisions.
posted on 26 October 2006 by skirchner in Economics
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Scary Book of the Week
It’s hard to know what aspect of this book (extracted in Der Spiegel) is the scariest: the mercantilist assumption of a ‘world war for wealth,’ arguing for a multilateral US-EU FTA as an economic NATO against a bizarre caricature of the East, or the fact that the ‘best-selling’ author was ‘Economic Writer of the Year’ in 2004. Then there are laugh-out-loud statements like this:
The EU Commissioners are the last true believers in the religion of free trade.
It does serve to illustrate that mercantilist thinking is extremely resilient, not least in Europe, and that arguments for free trade are never entirely won.
posted on 23 October 2006 by skirchner in Economics
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Future Fund or Future Eater? The Opportunity Cost of Commonwealth Revenue Hoarding
I have an article in the Spring issue of Policy magazine on the federal government’s Future Fund, which extends some of the arguments I have made here on the subject.
posted on 18 October 2006 by skirchner in Economics, Financial Markets
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Policy and Process at the RBA
While most journalists remain preoccupied with monetary policy outcomes at the expense of processes, at least some journalists remain interested in the procedural aspects of monetary policy formulation:
These outside [RBA Board] members are already expected to leave their private and business interests at the boardroom door. Publishing the minutes would only confirm this, wouldn’t it?
To insist on secrecy, ostensibly to protect the commercial sensitivities of board members’ comments in the course of debate, begs the perception, at least, that they may have something to hide. It also hints that the real reason may be to keep under wraps the occasional board conflict over rate decisions.
The Reserve Bank has come a long way from the obscurantism of the past. And, undoubtedly, the present approach has served Australia well in the way the bank has conducted policy in the past decade.
But shedding even more light on its decision making by publishing its board deliberations could only help Australians better understand where their mortgage payments and business borrowing costs are headed, and why.
posted on 17 October 2006 by skirchner in Economics
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Housing Cycles in International Perspective: The US, UK and Netherlands Compared
The Australian Treasury’s David Gruen and Steven Kennedy have prepared a useful comparison of housing cycles in Australia, the UK, the Netherlands and the US. Gruen and Kennedy make the simple point that the US housing cycle has been relatively muted compared to the experience of other countries. It follows that the broader macro implications of the US housing downturn should also be more muted than in these broadly comparable countries.
Gruen and Kennedy conclude:
Somewhat like the UK, US consumption growth rose only modestly above its longer run average during the housing price upswing. This again suggests that the US consumption slowdown might also be relatively modest…
it seems reasonable to expect a sharp cooling in the US housing market to generate a noticeable slowing in US economic growth over the next year or so. But it is hard to imagine a cooling in the US housing market, on its own, generating a US recession. For such an outcome to eventuate would, it seems to me, require some significant other adverse shocks – of the kind that hit the Netherlands economy at roughly the same time that its housing market was unwinding.
posted on 14 October 2006 by skirchner in Economics
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Demographic Underpinnings of US Growth
From the WSJ:
The U.S. population will hit 300 million at 7:46 on Tuesday morning, says the Census Bureau. But it’s the 400 million milestone, which the U.S. will reach in about 35 years, that has demographers and economists really talking.
Those additional 100 million people, many of them immigrants, will replace aging baby boomers in the work force, fill the Social Security coffers and, in all likelihood, keep the economy vital…
The Census Bureau says the U.S. population will grow by a further 34% by midcentury, even as Europe’s population shrinks by 8% and Japan contracts by 9%. As Columbia’s Mr. Prewitt puts it: “It’s deep in our culture to grow.”
posted on 13 October 2006 by skirchner in Economics
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US Housing in Perspective: Right Up There With Golf Clubs
Chicago Fed President Mike Moskow puts US housing in broader macroeconomic perspective:
On average, over the past 50 years residential investment has accounted for a bit under 5 percent of GDP. That’s about a third more than businesses spend building factories, offices, and commercial space, but in the same ballpark as how much households spend on recreation, which includes items such as golf clubs, football tickets, and, as the Commerce Department likes to call it, legitimate theatre and opera.
Five percent of GDP sounds small; but residential investment also is highly volatile, and over shorter periods of time it can influence GDP growth a good deal. For example, residential investment increased more than 25 percent and accounted for a full percentage point of GDP growth in 1976. But it fell at close to a 20 percent rate during the twin recessions in 1980 and 1981 and subtracted nearly a percentage point from growth in each of these years.
It’s important to remember, though, in the early 1980s mortgage rates were almost 20 percent and the unemployment rate reached nearly 11 percent. The drop in housing then largely was the result of these macroeconomic influences, and not the cause of them. That is, the recessions did not occur because residential investment fell so much; rather, the factors that caused the recessions also resulted in sharp declines in residential investment.
posted on 13 October 2006 by skirchner in Economics
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Tax Cuts to Compete
A CEDA Information Paper by Nic Gruen argues for a reduction in the company tax rate, to be funded by the abolition of dividend imputation. Gruen makes the point that the focus on aligning the company and personal tax rates has little support in economic theory and has led to an excessive focus on personal income tax cuts at the expense of reducing taxes on capital. I would make a similar argument in relation to capital gains tax, although Gruen’s paper does not address the issue and his evidence does not necessarily generalise to the case of CGT. For a good paper arguing in favour of the reduction in CGT in the Australian context, see Alan Reynolds’ 1999 report for the ASX, which examines the dubious intellectual foundations of the idea that we should tax capital gains.
Gruen argues for caution in interpreting some of the work coming out of the AEI on company tax, on the grounds that it might reflect their ‘free market ideology.’ As I have had occasion to point out previously, the economists at AEI are well to the left of Australian social democrats on some issues and to the left of some notionally ‘liberal’ (in the US sense of the term) US think-tanks like the Institute for International Economics. Even the Cato Institute has had some notable lapses, such as inviting Nouriel Roubini to its monetary policy conference last year. Some of the work coming out of the AEI should indeed be approached with caution, but not for the reasons suggested by Gruen!
posted on 12 October 2006 by skirchner in Economics
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RBA Governor Stevens on US Housing
Reserve Bank of Australia Governor Glenn Stevens, on the housing downturn in the US:
With the effects of a buoyant housing market thought to have been an important expansionary force in the US in earlier years, the recent change in sentiment in that market is understandably regarded as significant. Australian experience suggests, as does that of the UK, that the end of a housing price boom can have noticeable effects on aggregate demand. But those experiences also suggest that such effects are manageable. In Australia’s case, the resources boom coincided with the housing moderation and helped to dampen its effects, but that has not been the case for the UK, which has had broadly similar economic outcomes to our own. On this basis, one would think that there are reasonable prospects for moderate growth in the US economy in the period ahead. But this is obviously an area of uncertainty, and even a favourable outcome involves slower growth in US aggregate demand in the future than we have tended to see over most of the past decade.
posted on 11 October 2006 by skirchner in Economics
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Exploited by the Australia Institute
Mullah Hamilton’s puritanical Australia Institute is fond of media stunts, but its latest report into what it calls ‘corporate paedophilia’ has clearly overstepped the mark:
Sydney mother Louise Greig was baffled and upset to be included in the “corporate pedophilia” report for photographing her daughter Georgina to promote her business, “tween” clothing label Frangipani Rose.
Ms Greig said the report said “much more about [the Australia Institute’s] Dr Emma Rush than it says about us”.
“The idea that you can look at a photograph that I’ve taken of my own daughter and think, that’s pornography - what goes though that woman’s mind?” she said.
“What kind of planet does she live on, that she would think such sick thoughts?”
Ms Greig said she felt ill whenever she thought about the way Dr Rush had described her nine-year-old daughter as “leaning forward, with legs astride. Both pose and angle are reminiscent of porn shots”.
“The more I think about how the authors have psychoanalysed and viewed my daughter’s photo in a pornographic sense makes me feel sick to the stomach,” Ms Greig said.
“I feel defamed and vilified but thankfully my daughter is too young and innocent to understand that she has been exploited by Emma Rush.”
posted on 11 October 2006 by skirchner in Culture & Society
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An ‘October Surprise’ on US Q3 GDP?
Kevin Hassett argues that US Q3 GDP may play a role in the upcoming US congressional elections:
here is the kicker for Republicans: The data calendar indicates that GDP for the third quarter will be reported by the Bureau of Economic Analysis on Oct. 27, right before Americans enter the voting booths.
You might call it the “October surprise,” but in this case, economists will have seen it coming. Republicans, who have found themselves in the political equivalent of a nightmarish ballgame for some months now, will probably not be surprised that this break has gone against them as well.
My associates at Action Economics are arguing that any ‘October surprise’ will be up:
The market seldom watches U.S. wholesale trade reports, but this morning’s figures have revealed a robust growth trajectory for both sales and inventories that has further reduced prospects for a meaningful slowdown in GDP growth in Q3, as some still fear. We have not revised our 2.7% GDP growth estimate for Q3, but economists focused on a “1-handle” will have difficulty supporting such low forecasts.
Meanwhile, Nouriel Roubini is arguing that falling oil prices are a negative for the US economic outlook. Back when Nouriel was forecasting oil at $100/barrel, it was a different story:
I fully agree that oil prices will remain high for a long time; worse, they are likely to significantly rise towards $100 in the medium term (and some are already expecting oil at $90 by year end). Indeed, the factors that [Robert] Feldman suggested that may lead to lower oil prices in the future are all unlikely to take place. So, expect higher and higher oil prices and, at some point, another ugly stagflationary outcome.
Nouriel has only ever been interested in one story: his perverse hankering for macroeconomic ruin for the United States.
posted on 11 October 2006 by skirchner in Economics
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