‘Bubble Man’ Revisited
Late last year, I had occasion to review Peter Hartcher’s Bubble Man. For some reason, the book is only now receiving critical scrutiny in the US. Daniel Drezner reviews the book in the WaPo, although notes on his blog that:
It was difficult, in the space allotted, to list all the reasons I thought this book sucked eggs.
Dan also links to Steven Mufson’s review in The Washington Monthly:
By overemphasizing the damage done in the market and economic downturn in 2000-2001, Hartcher skews the answer to the question of whether Greenspan or any other Fed chairman ought to use the powers of his office to protect investors from bubbles given the Fed’s other, arguably bigger, responsibilities. The hot economy of the late 1990s had real benefits for many workers, especially those lower down on the income scale who didn’t have any stock portfolios. And while a disproportionate chunk of economic gains flowed to America’s wealthy, some job gains among middle- and lower-class Americans were real and a surprising number survived the recession.
posted on 14 August 2006 by skirchner in Economics, Financial Markets
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RBA Governor Macfarlane Unplugged
RBA Governor Macfarlane is interviewed by The Australian ahead of his departure from the top job next month. Macfarlane made precious few public appearances during his term as Governor and the interview gives some insight into why this is the case:
Macfarlane says the relationship between the governor and the Treasurer is a critical one - one which he has had no intention of jeopardising by getting up on a soap box on all sorts of issues.” We have been entrusted or delegated with independence,” he says. “It is a very valuable thing. I think it would be very foolish to jeopardise it by deciding you want to pontificate on subjects that are not relevant to your field.”
This degree of timidity is unwarranted. Both former Fed Chair Alan Greenspan and former RBNZ Governor Don Brash were quite outspoken on a wide range of issues, without compromising the independence of their respective central banks. Brash subsequently became leader of the opposition New Zealand National Party. Central bank independence does not mean being uncritical of government, it requires only that such criticism be expressed in a non-partisan fashion. To stay silent on issues which have a bearing on inflation and interest rate outcomes so as not to embarrass the government of the day is potentially even more compromising to the independence of a central bank.
Macfarlane is nonetheless correct in dismissing the notion that fiscal policy has had a material influence on monetary policy outcomes in recent years:
Macfarlane rejects suggestions that the last budget was highly expansionary, putting more pressure on the bank to raise rates.
“In the lead-up to the last budget, the Treasurer was under intense pressure to give massive tax cuts which he resisted and gave rather modest ones,” he says.
Macfarlane argues it is too soon to tell whether the tax cuts of the May budget will be stimulatory - particularly given the propensity of the Government to be on the receiving end of larger than expected tax revenues.
“The rather modest tax cuts he gave mainly consisted of returning the excess tax collections to the public,” he says. “Taxes may still come in faster than expected.”
Macfarlane goes on to defend the RBA’s antiquated governance framework, making this rather extraordinary argument in favour of not revealing minutes of the RBA Board’s proceedings:
He says board members who come from different interest groups need to be able to freely discuss their views without feeling they have to be publicly accountable. He says board members “have to be able to overcome their allegiances”.
“They wouldn’t be able to if it (their vote at board meetings) was relayed back to the sectors from which they came.
“If their votes were recorded it would be very hard for them at times to make decisions from the national perspective.”
Macfarlane is effectively conceding that the non-ex officio members of the Board are conflicted in their role as monetary policymakers. The notion that these conflicts of interest can be eliminated by cloaking them in a veil of secrecy would not be accepted in any other context and it is amazing that journalists - of all people - should continue to uncritically buy this argument from the Bank.
Meanwhile, opposition leader Kim Beazley has trouble telling one Ian Macfarlane from another.
posted on 12 August 2006 by skirchner in Economics
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What Nouriel Roubini Will Not Tell You about the US Economy
My associates at Action Economics take on the emerging bearish consensus:
Despite the market’s nearly uniform belief that a significant economic “slowdown” is underway, today’s retail sales, trade price, and inventory data join our reference yesterday to the litany of indicators that are refusing to cooperate with the consensus view.
For the record, we are seeing virtually no signs of a slowdown in consumer spending as we enter the second month of Q3, As gauged by today’s retail sales report as well as nearly all the consumer confidence and income statistics. The surge in July tax receipts revealed late yesterday, combined with the solid growth trajectory of hours-worked through the month from last Friday’s payroll report, ensures that income posted another round of solid growth on the month.
In addition, all the major factory sector indicators suggest continued solid growth in this bellwether sector, and industrial production to be released next Wednesday will reveal a big 0.6% July gain that follows the even bigger 0.8% June increase. In addition, as noted yesterday, both exports and imports entered Q3 on a robust growth path as signaled in the June trade report. And, the construction sector is continuing to post solid growth despite housing sector fears thanks to a booming commercial and public sector, as signaled by continued strength in building material prices, alongside steady 9%-13% y/y growth in sales of building materials that received a big boost from the 1.8% July sales surge. Inventories posted solid gains through Q2, though the ratio of inventories to sales remains remarkably lean.
We continue to believe that economic growth is moderating in these middle years of the expansion by about 0.5 percentage points, from a 3.7% clip over the last thirteen quarters to about a 3.2% rate, as Fed policy moves to neutral from accommodative. But this slowdown in real growth will be hard to see in many of the volatile monthly reports that the markets watch, and larger price gains in the second half of the expansion may diminish the effects of this moderation on the reports that are not inflation adjusted, like retail sales, or inventories.
For today’s data, note that retail sales grew at a solid 7.6% rate in Q2 despite a market focus on the “draining” effect of surging gasoline prices on the “real” spending component in the last quarter, which is an “above trend” growth clip despite notions in the market that the slowdown began with the consumer in Q2. In Q3, retail sales are on track to grow at a 7% rate, and with less of the gasoline “drain” on the real figures that will leave real consumption growing at a 3.3% Q3 rate that is right in line with our 3.0% Q3 GDP forecast.
posted on 12 August 2006 by skirchner in Economics, Financial Markets
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Unit Labour Costs and Inflation: Alan Reynolds Takes on Some Old Friends
Alan Reynolds on that recent WSJ editorial:
That editorial rebukes the Fed for drifting “back to the era of the Phillips Curve,” which blamed inflation on “wage push” resulting from low unemployment. Yet the same editorial enthusiastically embraced the Phillips Curve, fretting that “unit labor costs are now 3.2 percent higher than a year ago; that’s the fastest increase since 2000, when monetary policy was considerably tighter than it is now.”…
The Phillips Curve notion that increases in unit labor costs predict or cause higher inflation was debunked in studies from the Federal Reserve Banks of Richmond (Yash Mehra), Dallas (Kenneth Emery and Chich-Ping Chang) and Cleveland. The latter paper, by Gregory Hess and Mark Schweitzer, found “little systematic evidence that ... unit labor costs are helpful for predicting inflation.”
A March 2005 study for the Bureau of Labor Statistics by Anirvan Banerji found that “upturns in unit labor cost growth actually lag upturns in CPI inflation 80 percent of the time.”
The Fed is right this time, for a change. I regret to say that their toughest critics, including many of my oldest and best friends, are wrong.
The Reserve Bank of Australia’s model of inflation is a mark-up model based in part on unit labour costs. The RBA are the first to concede that the data reject their model. They impose it anyway and ask if it predicts inflation. It does, which makes this approach defensible, but still not very satisfying.
posted on 11 August 2006 by skirchner in Economics, Financial Markets
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RBA Rate Hike Probabilities: Are Census Workers Like Bananas?
RBA rate hike probabilities implied by 30 day inter-bank futures have surged after yet another strong employment report that sent the unemployment rate to new multi-decade lows of 4.8% in July. Early employment of Census workers probably contributed to the increase in employment in July, with another 10,000 addition to employment from the Census likely in August. Of course Census workers are no more to blame for higher interest rates than bananas.
Every three months, the Australian and New Zealand employment reports coincide. The two reports show the price Australia pays for a less liberal approach to labour market reform, with NZ’s unemployment rate re-visiting the record lows from last year at 3.6% in the June quarter. NZ also has an official cash rate of 7.25% compared to Australia’s 6.0%. This underscores a point we made previously: the sort of economic growth that drives unemployment rates to multi-decade lows is not going to give you low interest rates. Higher interest rates reflect good economic news, not bad.
By the way, weren’t Australia and NZ supposed to be in some sort of currency and financial crisis by now? Yet another failed Roubini forecast.
posted on 10 August 2006 by skirchner in Economics, Financial Markets
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Bono as International Tax Arbitrageur
U2’s Bono is not averse to a little international tax arbitrage:
The rock band U2 came under criticism yesterday after reports that it has moved a portion of its multi-million-pound business empire out of Ireland for tax reasons.
The band, fronted by Bono, the anti-poverty campaigner, has reportedly transferred some of its publishing company to Holland.
Based in Dublin, U2 have long benefited from the artists’ tax exemption introduced by Charles Haughey, the late prime minister. It is reported that the band’s move has been made in response to a £170,000 cap on the tax-free incomes introduced in the last Irish budget.
Bono is also apparently a founder and partner in a USD 1.9 billion private equity fund that has just taken a stake in Forbes media. Perhaps he is just following Lang Hancock’s dictum that the best way to help the poor is not to become one of them.
posted on 09 August 2006 by skirchner in Economics
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Bernanke & Inflation
The WSJ, channelling gold bugs and fever swamp Austrians, frets over the August Fed pause:
Mr. Bernanke no doubt hopes that yesterday’s pause is one that refreshes; we fear it has only postponed the ultimate day of reckoning.
James Hamilton instead offers a timely warning:
There are those who will doubtless never surrender their conviction that Ben Bernanke is in reality a bird, with the latest FOMC statement confirming him as a member of the family Columbidae. To those pundits I repeat my previous warning—if you invest based on that misunderstanding of Bernanke, you’re going to get whacked down by reality.
posted on 09 August 2006 by skirchner in Economics, Financial Markets
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The Dr Strangelove of Global Macro, Part II
Nouriel Roubini has engaged in a furious linking frenzy over at Doomsday Cult Central in support of his US recession call. Nouriel seems oblivious to the paradox that makes recession forecasting so difficult. Recessions are inherently difficult to predict, because if they could be forecast with reasonably accuracy, policymakers would take action to avert them and the public would change their behaviour in ways that would mitigate their effects. The news and data flow that Nouriel points to in support of his recession call is the same information that the Fed will be responding to when it (more than likely) decides to pause its tightening cycle in August. Nouriel now acknowledges this possibility in his latest post, but argues that a new Fed easing cycle will be too little, too late to avert recession.
All this conveniently ignores the fact that Nouriel has been prominent in arguing that monetary policy should respond to asset price ‘bubbles,’ particularly the supposed US housing ‘bubble.’ If the Fed had taken Nouriel’s advice, US interest rates would presumably be even higher than they are now, greatly increasing the risk of the recession Nouriel claims is now imminent. Indeed, the central bank that has most explicitly targeted house prices in its official explanation of policy, the Reserve Bank of New Zealand, had a narrow brush with recession in the second half of 2005.
Nouriel is not alone in trying to have his monetary policy cake and eat it too. Even conservative commentators who should know better, like Des Lachman of the AEI, have sought to argue that the Fed both failed to ease quickly enough in the wake of the tech ‘bubble’ and then eased too much to prevent the housing ‘bubble.’ Lachman and Roubini are effectively claiming that they know of some alternative path for Fed policy that would have better smoothed both asset prices and the real economy, leading to better macro outcomes. This is nothing but after the fact hubris. Adam Posen has presented a definitive debunking of Nouriel’s arguments in favour of central banks targeting asset prices. I make similar arguments here against those who argue that the Fed could and should have prevented the US tech ‘bubble’ of the late 1990s.
Nouriel was spectacularly wrong in his structural bear call on the US dollar in 2005, not because the USD failed to collapse as he predicted, but because even if it had, it would have had none of the consequences he predicted (remember that this too was meant to have caused a recession!) It is not enough simply to be a permabear and then wait for the cycle to finally deliver vindication. You have to be right for the right reasons.
posted on 06 August 2006 by skirchner in Economics, Financial Markets
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Why Do Economists Blog?
The Economist asks why economists blog. I’ve always thought the opportunity to make fun of The Economist magazine was reason enough, but that’s just me! The Economist raises the obvious question about the opportunity cost of blogging. The most frequent question I get asked about blogging is ‘where do you find the time?’ but I have never found blogging particularly time consuming. I put this down to the fact that my blogging is more often than not an extension of work I am already doing. Leveraging this into a blog post is not particularly demanding.
In some respects, economics blogging is a return to an older tradition in economics that had a much stronger public orientation and interest in substantive issues. This tradition has been lost as the discipline has become increasingly consumed by technique. Dan Klein has written eloquently about this in What Do Economists Contribute? It is no accident that the economics faculty at George Mason University are such active bloggers. They are some of the best representatives of this older tradition and among the most interesting academic economists in the world today.
posted on 04 August 2006 by skirchner in Economics
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The RBA’s Non-Statement on Monetary Policy
Once every three months, financial markets turn to the RBA’s quarterly Statement on Monetary Policy for guidance on the monetary policy outlook. More often than not, they are disappointed. It’s not hard to see why. The quarterly Statements are scheduled after the Board meeting that follows each quarterly CPI release, so they typically serve as vehicles for the ex post rationalisation of existing policy moves, while studiously avoiding any explicit discussion of the policy outlook. The broad-brush inflation forecasts contained in the Statements have taken on an increasingly endogenous character, being left largely unchanged from one Statement to the next because of intervening policy moves. It is unlikely that the RBA would forecast underlying inflation outside the target range, since this would beg the question as to why policy action had not already been taken to pre-empt it. The Bank would essentially be admitting that it was in the process of making a policy error.
Instead of persisting with the fiction that inflation is an exogenous variable, the RBA should move to formally endogenise its forecasting process to a published projection for the official cash rate that it believes is likely to be consistent with maintaining inflation within the target range. This would help ensure the credibility of its medium-term inflation target, by making it more explicit that inflation is not an exogenous variable under an inflation targeting regime, as well as giving clearer guidance on the monetary policy outlook.
posted on 04 August 2006 by skirchner in Economics, Financial Markets
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RBA Governor-Designate Glenn Stevens
Stephen Gordon’s recollection of RBA Governor-designate Glenn Stevens:
We both did our MA at the University of Western Ontario during the academic year 1984-85. I’m pretty sure that Glenn Stevens was the best student of our cohort (I think I was second), and I remember him telling me that UWO tried very hard to persuade him to stay on to do a PhD. He thought that it would be a waste of time, since he wasn’t interested in academia. Thinking of the Bank of Canada - where it’s well-nigh impossible to go very far without a doctorate - I asked him if he was worried about limiting his options. He didn’t think he was - and it turns out the he was right.
In his picture, he has much less hair than I remember. But then again, so do I.
Good on you, Glenn; I wish you well from the other side of the world.
Another profile of Glenn Stevens here.
posted on 02 August 2006 by skirchner in Economics
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Do You Really Want Lower Interest Rates?
The government’s claim that it can keep the level of interest rates lower than the opposition Labor Party may have been an effective line at the last federal election. The downside is that it makes it harder for the government to then turn around and disassociate itself from interest rate outcomes in the midst of a tightening cycle. In the short-run, interest rate determination has very little to do with anything the government does (within reasonable bounds) and the policy differences between the two major parties are certainly not large enough to have a significant influence on interest rate outcomes.
Interest rates can be expected to cycle around their long-run equilibrium real rate. This long-run real rate is determined by structural factors, such as productivity growth and the real rate of return on capital. We are conditioned to think of higher real interest rates as being bad for economic growth, but this is true only in a narrow cyclical sense. The long-run real rate is determined by the real rate of return on invested capital and we want this rate to be higher, not lower. Countries like Australia and New Zealand have higher interest rates than found in many other industrialised countries in part because their growth prospects are relatively stronger (it is also why they have relatively large current account deficits). High real interest rates and current account deficits are symptomatic of economic strength, not weakness.
The country that has been most successful in keeping interest rates low in recent years has been Japan, which achieved this dubious distinction by saving too much, over-capitalising its economy and trashing the real rate of return on invested capital. Not coincidentally, Japan also runs a current account surplus.
posted on 01 August 2006 by skirchner in Economics, Financial Markets
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The Dr Strangelove of Global Macro
It doesn’t take much to get Nouriel Roubini excited these days. US Q2 GDP falls short of expectations, and Nouriel starts salivating over the prospect that the cycle might finally validate his years of perverse doom-mongering:
this Q2 GDP report is as bad as it could be. I thus stick with my prediction that, by Q4, the growth rate will be close to zero and by early 2007 the U.S. will be in a recession. Panglossian optimists have been proven wrong again. They’d better start adjusting their wishful-thinking forecasts of H2 growth (still close to a 3% consensus) to a reality of an economy rapidly slipping into an [sic] nasty recession.
Nouriel is nothing if not thorough in his bearishness. If Nouriel is to be believed, not a single asset class or region will be spared:
In 2006 cash is king and all risky assets (equities, EM bonds, currencies and equities, commodities, credit risks and premia) will be battered once the markets finally comes [sic] to the realization that a U.S. recession followed by a serious global slowdown is coming.
Finally the other delusion in the market is that, even if the U.S. were to slow down, the rest of the world (EU, Asia, China, Japan, Emerging Markets) will be able to “decouple” from the U.S. slowdown and keep on growing perkily…quite simply, when the U.S. sneezes the rest of the world gets the cold. The decoupling fairy tale will be proven as wrong as the U.S. soft landing Panglossian fairy tale.
So Nouriel pretty much has all bases covered for anything that might go wrong anywhere in the world for the foreseeable future.
posted on 29 July 2006 by skirchner in Economics, Financial Markets
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Yes, We Have No Bananas, Part II: When Protectionism Bites Back
The Prime Minister says he has not ‘met a political leader who can stop a cyclone,’ but the government can certainly stop banana imports:
Biosecurity Australia has been considering an application from The Philippines to export bananas to Australia since 2000 and made a draft recommendation two years ago that conditional permission be granted.
The draft produced a storm of protest from growers and a senate inquiry, forcing the Government to send Biosecurity Australia back to the drawing board to prepare a further risk assessment next year.
This week’s CPI shock is a nice case of protectionism coming back to bite the government in the arse.
posted on 29 July 2006 by skirchner in Economics
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The Failure of Multilateralism
Clive Crook on the failure of the Doha Round:
The saddest part is that the process itself is no longer mitigating that problem but compounding it. The World Trade Organization and its precursor, the General Agreement on Tariffs and Trade, were designed as a forum in which governments could demonstrate to their electorates that trade liberalization was a win-win game. Rather than convincing voters that lowering their own tariffs is good for them (as it is), the process relied on showing that other countries would lower their tariffs as well. The model was based on an exchange of “concessions”—trade reform as shared sacrifice. It was intellectually dishonest but, undeniably, it worked. In the decades after 1945, the world moved from comprehensively managed trade to a more liberal trading order, with fabulous economic results.
Big exceptions remained—notably agriculture, ever the sticking point—but nobody was complaining. The system was apt to wobble from time to time, as you might expect, because it was based on a lie. But for a good few decades it effectively mobilized export interests against groups demanding protection, and the politics worked.
Progress was slowing even before the Doha Round. But this week the “exchange of concessions” model finally fell in on itself. The WTO process is no longer assisting liberalization. It is blocking it and, worse, legitimizing the failure. The world has settled for less-than-liberal trade. It is a multitrillion-dollar error; a crime, truly, against the world’s poor; and, it seems, a story barely worth reporting.
posted on 29 July 2006 by skirchner in Economics
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