US Economic Malaise
Posted: February 8, 2011 Filed under: Economic Develpment, Global Financial Crisis, U.S. Economy, We are so F'd | Tags: economic outlook 2011, joseph stiglitz, Nouriel Roubini 15 Comments
I happened across the latest outlook for the global economy by Dr. Doom–Nouriel Roubini–over at Project Syndicate. We must share the same depressed muse. His outlook is very similar to mine although he’s crunching numbers in computer models that I can only dream about. It’s also a similar outlook to what Joseph Stiglitz indicated while in Davos. You will not need sunglasses while facing the future if you’re in Europe or North America. This will most likely be the decade of developing nations. I don’t have the sophisticated programs available to Roubini but his forecasts seem reasonable.
The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.
The word anemic is never one you want to see when talking economic forecasts. Roubini does identify a few possible black swan events related to things like the deterioration of the Spanish economy that could make anemic sound like a good thing. His comments on the US economy indicate more of the same. None of the same is pleasant.
The United States represents another downside risk for global growth. In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation. Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the US and Europe maintain a risk-averse stance toward lending.
There’s some indication of our potential black swans in that paragraph. Every economist is attuned to the solvency problems in states like Illinois, New Jersey, and California. There is also no faith in the federal government’s ability to bail out any one but political donors. The only hope I have for the situation is that it’s an election year and those do tend to be important states electorally for presidential wannabes.
The other trends that worry me are the trends in oil and food prices which could mean that huge countries like China may have to readjust their plans with their sovereign wealth funds. Countries that import a lot of these items are going to be in for hefty bills. China is already experience inflation and has upped its interest rates. Roubini is watching for further signs that they recognize the potential problem. He also believes these tensions will further fuel currency tensions.
Roubini actually sees some upside risks and believes that we will slowly pull out of things. He believes that all sectors are still engaging in balance sheet repair with the exception of the US government. This is especially significant for the potential for jobs creation. If corporations are lean and mean and things do improve, this could create some much needed labor demand.
Joseph Stiglitz wrote a column for the UK Guardian after his Davos trip for the World Economic Forum. He may actually need to take the Dr Doom title from Robini. He focused on some systemic things that you might find interesting. Once again, we see an evaluation of the Efficient Market Hypothesis (EMH). This is something that should’ve happened years ago. He also mentions some skepticism of the monetarist (aka Milton Friedman) positions of central banks on inflation.
But this time, as business leaders shared their experiences, one could almost feel the clouds darkening. The spirit was captured by one speaker who suggested that we had gone from “boom and bust” to “boom and Armageddon”. The emerging consensus was that the International Monetary Fund (IMF) forecast for 2009, issued as the meeting convened, of global stagnation – the lowest growth in the post-war period – was optimistic. The only upbeat note was struck by someone who remarked that Davos consensus forecasts are almost always wrong, so perhaps this time it would prove excessively pessimistic.
Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.
The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further scepticism.
A Self-Examined Academic Life
Posted: February 6, 2011 Filed under: academia, Equity Markets, financial institutions, Global Financial Crisis | Tags: Fault Lines, Financial Crisis, Matt Yglesias, Raghu Rajan, Tyler Cowen 22 CommentsMacroeconomists seemingly have adopted monastic practices of self-flagellation to explain why the tribe completely
misjudged the housing bubble . Their collective crystal balls didn’t predict an ensuing financial crisis either. A blog entry by Finance Professor Raghu Rajan at University of Chicago has further stimulated the conversation today. He’s written a book called Fault Lines and made remarks from the book at its official blog site. I found it at Memeorandum along with a few choice links.
I’ve written about fresh water and salt water economics before. Some of today’s discussion clearly involves philosophical fault lines. Rajan is from the panultimate fresh water university and all finance academics eventually drown in the Efficient Markets Hypothesis (EMH) literature. I’ve been pretty outspoken about how much damage I think the EMH has done to economics and especially my field, financial economics. However, it’s hard to get published in finance journals taking a contrarian view. This is one explanation he examines, then dismisses which is why I’ve taken a good look at his argument.
I have not read his book, but judging from the video and this blog entry, Rajan spends some time on the role of EMH and EMH true believers in the crisis. I can provide you with my own anecdotes on this. I can also tell you I tried to avoid some seminars because I don’t want to read any more Eugene Fama who is Rajan’s colleague. I frankly think EMH blinders or misunderstanding were a good deal–but not all–of the problem.
I was researching the subprime markets directly after Katrina and was told by my finance professors that I was following an unpublishable and boring line of research. (They used the term ‘unsexy’.) I saw hints of problems in subprime markets as early as late 2005 in the work I did with the sensitivity of stock prices of finance companies heavily invested in subprime loans to some key macroeconomic variables. I was told that line of research was unlikely to help my marketability and ability to get tenure upon graduation. They yawned when I presented the paper. I turned it in for my third econometrics seminar and switched to something else.
Finance journals editors do love them some EMH so anything on market anomalies is likely to get a jaundiced set of editor eyes. But, Rajan brings up some important points and the resulting discussion is worth viewing here. Here’s Rajan talking directly to the EMH and why he thinks it may not be a big deal.
Perhaps the reason was ideology: we were too wedded to the idea that markets are efficient, market participants are rational, and high prices are justified by economic fundamentals. But some of this criticism of “market fundamentalism” reflects a misunderstanding. The dominant “efficient markets theory” says only that markets reflect what is publicly known, and that it is hard to make money off markets consistently – something verified by the hit that most investor portfolios took in the crisis. The theory does not say that markets cannot plummet if the news is bad, or if investors become risk-averse.
Critics argue that the fundamentals were deteriorating in plain sight, and that the market (and economists) simply ignored it. But hindsight distorts analysis. We cannot point to a lonely Cassandra like Robert Shiller of Yale University, who regularly argued that house prices were unsustainable, as proof that the truth was ignored. There are always naysayers, and they are often wrong. There were many more economists who believed that house prices, though high, were unlikely to fall across the board.
Rajan points out that this probably isn’t the sole or primary explanation even though it is one that gets a lot of ink these days. I too think some of the problem is a misunderstanding of the various forms of EMH . So, the major philosophical debate happening in finance circles isn’t central to Rajan’s explanation. There is no conspiracy of EMH apologists to force misunderstanding of market rationality, so alright, I’ll give him that one.
Economist Tyler Cowen at Marginal Revolution likes the alternative succinct explanation Rajan provides. (You should read the comments to that thread.)
Raghu Rajan nails it:
I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.
Rajan also dismisses another circle of conspirators by stating this. It’s also probably why one of those so-called progressives jumped on the dismissal earlier today. This conspiracy meme crosses circles of folks that are more into political economy than economics itself. This group argues the hypothesis that the “system” bribed economists to stay quiet. I’ve gotten into it more than a few people of the Matt Stoller mindset and various Rand hanger-ons about this improbable case. One of the biggest memes is that the FED actively influences economists not to publish things against their interests. (Usually, this comes from Austrian School folks who can’t get published any where mainstream because they want to completely operate outside of the scientific method and ignore data.) Matt Yglesias is one of these people making a living off this canard and he jumped to the bait immediately. His reasoning speaks more about him than about economists.
Monday Reads
Posted: January 31, 2011 Filed under: Corporate Crime, Egypt, Foreign Affairs, Global Financial Crisis, income inequality, John Birch Society in Charge, morning reads, SOTU, The Bonus Class, The Great Recession, U.S. Economy, U.S. Politics | Tags: Bennett, Corporate Welfare Recipients Koch brothers, GDP growth, Hatch, Innovation, median incomes flat, Public cost cutting leads to death, Snowe, Tea party targets Lugar, The Great Stagnation, Uncloak the Koch brothers 75 CommentsI thought I’d start the day off with some new topics given we’ve spent the weekend following world events unfold. One of the major complaints of the Egyptian people is their high unemployment rate. It’s basically the same as ours. They also have seen rising food and energy prices. Our overall price inflation is well under control at the moment, but there are world events that have made food and energy prices more volatile than usual. The Egyptians have experienced GDP growth rates that are twice ours, but like our country, the income improvements have advantaged the very few instead of the many for many of the same reasons. One of the guys that skedaddled on that airplane was the big telecom industry captain. We have many huge corporations–like GE–that exist on no bid government contracts that they never lose, even when they’ve been found endlessly maleficent.
I thought I’d start with Tyler Cohen who has been riffing on themes relevant to his for sell on line pamphlet The Great Stagnation. His NYT article this weekend buried one of the themes of the SOTU. It’s called ‘Innovation Is Doing Little for Incomes’.
The income numbers for Americans reflect this slowdown in growth. From 1947 to 1973 — a period of just 26 years — inflation-adjusted median income in the United States more than doubled. But in the 31 years from 1973 to 2004, it rose only 22 percent. And, over the last decade, it actually declined.
Most well-off countries have experienced income growth slowdowns since the early 1970s, so it would seem that a single cause is transcending national borders: the reaching of a technological plateau. The numbers suggest that for almost 40 years, we’ve had near-universal dissemination of the major innovations stemming from the Industrial Revolution, many of which combined efficient machines with potent fossil fuels. Today, no huge improvement for the automobile or airplane is in sight, and the major struggle is to limit their pollution, not to vastly improve their capabilities.
Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living. It seems that we are coming up with ideas that benefit relatively small numbers of people, compared with the broad-based advances of earlier decades, when the modern world was put into place. If pre-1973 growth rates had continued, for example, median family income in the United States would now be more than $90,000, as opposed to its current range of around $50,000.
You can find more discussion at Marginal Revolution. The Economist weighed in on the booklet tonight.
improvements in rich world living standards may, for the moment at least, come from the capture of policy low-hanging fruit. In other words, the rich world should focus on getting rid of blatantly foolish and costly policies. Moving from taxes on goods, like income, to bads, like traffic congestion, would be a good start. Not spending so much on medical treatments with dubious benefits would be another possibility. Cutting out policy foolishness like agriculture subsidies and the mortgage-interest deduction would be another positive step. Amid rapid growth, really silly policy choices could be tolerated, since surpluses continued to rise. As growth rates slow, the failure to cut out bad policies will mean continued stagnation or declines in living standards for some.And it’s a little amusing to focus on the implications of the spread of cheap-to-free internet amusement. As Mr Cowen notes, the availability of good, free internet entertainment has allowed a lot of people hit hard by falling incomes or recession-induced joblessness to maintain relatively high levels of utility (though this available substitute has also made it easier to cut down on physical consumption, with nasty effects on GDP).
Paul Krugman agrees here. Robert Reich struck a similar chord on stalled incomes in his response to the SOTU. Reich focuses on one of our topics. That would be the important list of what the president didn’t say.
What the President should have done is talk frankly about the central structural flaw in the U.S. economy – the dwindling share of its gains going to the vast middle class, and the almost unprecedented concentration of income and wealth at top – in sharp contrast to the Eisenhower and Kennedy years.
Although the economy is more than twice as large as it was thirty years ago, the median wage has barely budged. Most of the gains from growth have gone to the richest Americans, whose portion of total income soared from around 9 percent in the late 1970s to 23.5 percent in 2007. Americans kept spending anyway by using their homes as ATMs but the bursting of the housing bubble put an end to that – leaving them without enough purchasing power to reboot the economy. So the central challenge is put more money into the pockets of average Americans.
This narrative would be politically risky (opening Mr. Obama to the charge of being a “class warrior”) but at least honest. And it would allow him to connect the dots – explaining why his new health-care law is critical to reducing medical costs for most working families, why tax reform requires cutting taxes on the middle class while raising them on the rich, why the Bush tax cuts shouldn’t be extended for the wealthy, why deficit reduction must not sacrifice education and infrastructure (both important to rebuilding middle-class prosperity) and why any cuts in Social Security or Medicare must be on the backs of the wealthy rather than average working families.
I still can’t believe we have a President that doesn’t run a counter narrative to the Republican Voodoo economic fantasy. I guess it’s left to those of us in the blogosphere to hammer home traditional democratic values. So, speaking of some of the worst of the worst, there’s a movement afoot to UnCloak the Kochs. Those John Birch Society Billionaires that want to bring down social security have been taking up some virtual ink in left blogistan. Here’s something from the New York Observer: ‘7 Ways the Koch Bros. benefit from Corporate Welfare’.
Now that we’ve heard about their charitable giving, David’s 240-foot mega-yacht and role as patrons of the Tea Party movement, it’s time to ask a more serious question: How libertarian are they?
The short answer…not very.
Charles and David Koch, the secretive billionaire brothers who own Koch Industries, the largest private oil company in America, have spent millions bankrolling free-market think tanks and pro-business politicians in order, as David Koch has put it, “to minimize the role of government, to maximize the role of private economy and to maximize personal freedoms.” But a closer look at their dealings reveals that for the past 35 years the brothers have never shied away from using government subsidies to maximize their own profits, even while endeavoring to limit government spending on anything else.
These guys are a veritable bankroll for so-called think tanks that spout more tank than think. Some one should let them know that their businesses are hardly shining examples of a free market. These guys are card carrying members of the crony capitalist set.
In 1977, Charles Koch founded the Cato Institute, an influential libertarian think tank, with the aim of injecting free-market ideas into the mainstream. The Kochs would go on to establish and fund a vast network of overlapping think tanks, institutes, foundations, media outlets, and lobby groups that would vilify centralized government and promote laissez-faire capitalism as the only route to economic prosperity. The Mercatus Center, Americans for Prosperity, Reason Magazine, the Federalist Society and the Heritage Foundation are just a few of the right-wing organizations that run on Koch cash today.
David Dayen has a post up at FDL about protests organized to protest these bloated trust fund babies and their plutocratic friends. These guys are manufacturers of stupidity like climate change denial. Common Cause organized the protest.
After a litany of speakers – including Jim Hightower, Rick Jacobs of the Courage Campaign, and Common Cause President and former Illinois Congressman Bob Edgar, the entire group of protesters moved to the setup across the street from the resort. Police helicopters buzzed overhead. After a while, the police agreed to shut down Bob Hope Drive, and the protesters streamed across the street and directly in front of the resort, just a few inches away from the phalanx of riot cops. The usual protest chanting and raising of banners ensued. More cops were brought in, traipsing over the flower beds. And 25 protesters were taken away in a paddy wagon. The protests were generally peaceful, and the police professional.
The protesters generally decried the Koch Brothers’ influence over American democracy, in particular their use of the Citizens United ruling to spend corporate money in elections. Koch Industries’ funding of climate denialism and other conservative causes was on the minds of the protesters as well.
You can read some of the dirty deeds that pay others to do dirt cheap in the NYT article on the Tea Party targets. Here’s the list of who is in their ‘surveyor’ marks for the 2012 Senate elections. Evidently, Indiana Senator Richard Lugar is one of the guys they’re after. Here’s some more making their unclean, impure list.
In Maine, there is already one candidate running on a Tea Party platform against Senator Olympia J. Snowe. Supporters there are seeking others to run, declaring that they, too, will back the person they view as the strongest candidate to avoid splitting their vote. In Utah, the same people who ousted Senator Robert F. Bennett at the state’s Republican convention last spring are now looking at a challenge to Senator Orrin G. Hatch.
The early moves suggest that the pattern of the last elections, in which primaries were more fiercely contested than the general election in several states, may be repeated.
They also show how much the Tea Party has changed the definition of who qualifies as a conservative. While Ms. Snowe is widely considered a moderate Republican, Mr. Hatch is not. Mr. Lugar, similarly, defines himself as a conservative. He argues that he has consistently won praise from small-business groups, supported a balanced budget amendment and pushed for a reduction in farm subsidies and the closing of agricultural extension offices as part of an effort to reduce unnecessary spending — all initiatives that fall under the smaller government rubric of the Tea Party.
Guess that means there’s more bat shit crazy folks waiting in the wing to mangle and destroy American history and the constitution. Do you suppose we’ll see any more “I am not a witch” ads?
So, last week I posted something sent to me from BostonBoomer about the rise in violent attacks in prisons due to cost cutting measures and outsourcing to private firms. BB’s found another more horrible link. CNN reports the death of a correctional officer in Washington who had made a complaint to her union steward that she feared for her safety.
Jayme Biendl, 34, was discovered late Saturday night after workers at the Monroe Correctional Complex noticed her keys and radio were missing, according to a statement from the Washington State Department of Corrections. Staff at the prison immediately went to where she worked and found her unresponsive, it said.
Emergency responders declared Biendl dead at the scene shortly before 11 p.m. PT, the department said.
She had been strangled, according to Chad Lewis, a department spokesman.
So, it’s monday morning, I spent all weekend rewriting an article on Venture Capital. As long as you don’t have anything to say about that, because I’ve frankly reached my fill on the subject , I’d like to know …








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