Cochrane on the state of macro and finance

As was to be expected, Greg Mankiw didn't stop at posting Eichengreen's link (see my previous entry), but found a different and, from some angles, much better one, this one written by John Cochrane. Here is a link to his post, here is a link to Cochrane's essay (NB: it is an MS Word document, .doc format and all), and here is a link to Cochrane's news page, which includes the essay (and where he asks readers to link to as he may edit it and change its location).

Cochrane's article is simply beautiful. It reminded me why I went into econ to start with. For real. If you are interested in understanding where econ stands and have not been exposed to a doctorate in it, but are willing to spend the time trying to get some nuance (as opposed to Krugman's caricatures), read it.

It is much more detailed about the state of macro and finance than Eichengreen's, while lacking the healthy level of mea-culpa in the latter. I see it as follows: the state of econ, including macro and finance, is fine, thank you (Cochrane), but given incentives, some economists were not introspective enough and joined other agents who, given their incentives, contributed to the bubble and the current crisis.

Together, they are what the NYT should have published.

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Barry Eichengreen as counterweight to Paul Krugman's NYT piece?

No, I'm not dead nor have I been spirited away. And no, I didn't give up blogging. Instead, I've been blogging quite frequently about current economic issues in the US (ironically, being a micro econ, mostly about macro... well, it used to be my job a long, long time ago) here. Warning: it is in Spanish... and a tribute to "they all return to their roots" cliche: the blog is hosted by the think tank / consulting group I used to work for in Peru (yes, Peruvians are interested in the economic comings and goings of the US).

'Nough said.

Point of this entry is to have a place to keep handy a link.

You see, I'm sure y'all have heard about the article / shock-piece Paul Krugman recently published on the NYT, a rather lengthy piece of... well, to call things what they are: a rather selective and I dare say inaccurate re-writing of the history of ideas of economics, in line with his agenda to... what? Re-interpret and resurrect Keynesianism? Settle old scores? Gain popularity among the wide, non-econ public, and political points in some camps?

Just like the Bush admin tried to do about everything, just like it is happening now with the causes of the crisis and health care reform, Paul has fallen into the game of finding evildoers to explain away the problems of the world. It is worrisome, coming from such a smart guy.

C'mon people: policy issues are nuanced, the causes (and ways out) of the crisis are nuanced, health-care reform is nuanced... What isn't that is interesting and worth pondering? The infantile effort to reduce everything to a search for evildoers was stoopid then and it is not any smarter today. It does a disservice to our effort to understand how we got somewhere and how to prevent it from happening again.

We will lynch economists or financiers or insurers or pharma researchers or... And, with all the incentives still in the wrong place, it will all happen again.

So the popularity of Paul's piece was rather depressing. And that is why, when I remembered this little piece, I couldn't stop myself from linking to it.

It is old (end of April), but it is well-written and much more accurate (and, yes, nuanced) than Paul's. Rather than looking for bugbears in the dark, it... well, I'll let you read it. It is written by Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley. Here it goes:

The Last Temptation of Risk

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This trully scares me

Source.

True, Obama cheekily dismissed budget projections (and hence, implicitly, budgets in general) last Tuesday night, but for those of us who think that some sort of educated guesswork is more useful than walking blindly into the future a la Bush, the CBO is a pretty respectable, non-partisan source of such stuff.

With output at potential starting in 2015, the CBO's baseline projection is a 2% structural deficit from then on... and a 4% and worsening deficit under the President's Budget.

So true, as Obama said, there will be deficits with or without his budget... it's only that, with it, they are worse and keep getting worse.

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Can't tell anymore...

Source.

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On Summers

Newsweek (!!!) has a cute little piece on Larry Summers. Here's my favorite, non-policy relevant part:

Summers is generally said to suffer from smartest-kid-in-the-class syndrome. He has heard the criticism so many times he has a slightly wounded, misunderstood air. Unlike some people who pretend to listen, Summers says he actually does listen—but he admits to an unfortunate tendency to look bored or impatient, which he acknowledges can seem rude. Summers can be playful and charmingly irreverent. But he can also just be rude.

Everyone has a Larry story, it seems. Princeton economist Alan Blinder recalls head-on collisions with Summers in the '90s. "As everybody knows, Larry is very smart and he likes to show it," says Blinder, who served on Clinton's Council of Economic Advisers and later as Fed vice chair.

Truth be told, he sounds just like any econ academic I've met worth his/her salt. Whether that's good or not, who knows? Not me, but there you have it, that's how we were re-socialized.

And nope, I do not have a Summers story. Which is for sure not uncorrelated in deep, multi-layered, symbolic ways to why I'm blogging about this little article instead of doing meaningful work on policy issues.

(But I do have an Ed Glaeser story.)

p.s. "cute" and "Summers" in the same sentence? My, oh me, I need to re-re-socialize myself ASAP!

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The dark side of econblogging (one of them)

Clive Crook:

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party... Politics and economics are always difficult to keep apart... Consensus economics does exist. The Obama administration and the Federal Reserve are trying to apply it. The economics professoriate has an obligation to criticise and improve those policies. But if politics is allowed to split the discipline, and communication across that divide continues to break down, the science of economics will forfeit what little respect it still commands.

Experts from whatever discipline may become the worse kind of hacks when it comes to politics. Economists are certainly not above that. What sets economists apart is that, with so much of politics being about economic policy, economics becomes one with politics with an ease that, say, physics or English Lit lack.

If only it were possible to tell when the same people are playing the role of propagandists and when that of thoughtful experts (who may, with all sincerity and after their best efforts at rigorous analysis, still disagree). But it is not and, unfortunately, some call themselves "economists" indiscriminately under both guises.

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Night of the Living Dead

Graph time! Two of my favorites this week!

First one: as of 1/21/09, US commercial bank capitalization is less than the second tranche of TARP funds (less than $350 bn).

(Source, but hurry! The content of the page is frequently updated.)

Of course, this is not the same as "just go ahead and buy the damned things!" as purchasing common stock is not the same as injecting new capital. But it does give an uncomfortable sense, bordering on schadenfreude, of how the mighty have fallen (check out Citi and BoA, ex "largest bank in the US") and also of how insignificant commercial bank capital has become (was always but for incorrect valuations and off-balance items?) with respect to their liabilities.

The second graph hardly needs any words beyond "who's your daddy/main shareholder?" and "click on the source link to see a larger version":

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Meta-markets (second quote of the day)

"I've abandoned free-market principles to save the free-market system." G. W. Bush, Dec. 16, 2008
Source.

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Quote of the day

"Bankruptcy is not the same as liquidation."
Source.

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Reanimator: US automaker rescue package

This is at least the third time since the early 80s that the US automakers have asked (and in now seems, received) some form of Federal bailout (or change in the regulatory framework), threatening with the end of Western civilization if they didn't get what they ask for.

First they needed help because the oil shocks would never let anyone drive ever again, then because the Japanese automakers were exploiting their workers with inhumanly low wages, and now that expensive oil and commodities can't be blamed, it's because of the financial crisis.

But this is not (mainly) a labor or finance cost issue, which is where most of the political "debate" seems focused on: the share of US automakers within the US market has been plummeting for some 30 years. That trend might have something, but not a lot to do with labor costs, something, but not a lot to do with the end of the securitization of 0% financing loans, and something, but not a lot to do with the operational costs imposed by the byzantine and anticompetitive contracts signed between the automakers and their autodealers.

The reason is much sadder and more terminal: terrible management and even worse innovation and quality policies have led growing numbers of US consumers to prefer "foreign" cars assembled in the US. And this despite American cars being $2,600 cheaper than the comparable foreign car (obviously not cheaper enough and inferior along some hedonic dimension not measured in the price comparisons). [See here for an excellent summary of the labor cost side of the equation and for the source of that number].

At the end of the day, automakers and unions negotiated brilliantly with the Feds; they didn't blink and ended up twisting the Treasury's arm when they failed with the Senate, though the White House will surely push back somewhat. Now TARP funds will be used to prop them up for a few months until they require more funds for more propping up.

Thus, Q: if what we want is to avoid putting workers and suppliers on the street and keep household expenditure going, wouldn't a more cost-effective use of taxpayers funds be to subsidize the transition of these companies' workers and suppliers into new jobs and contracts (or, more broadly and fairly, simply return money to taxpayers) and let the carmakers file for bankruptcy, instead of re-rescuing these dinosaurs who have shown themselves unable to face competitive challenges for decades?

It's a pity that a problem which could mostly be dealt with through restructuring under bankruptcy protection has become a political issue in which public funds will be used to raise zombies. There're too many vested interests against doing the right thing: executives would lose, union leaders would lose, current creditors would lose... and some politicians would lose face. It's only the other 300 million Americans who would benefit if things were done right.

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Car bubble

Yet another failed attempt to pass the rescue package for US automakers. How long before they try again? February? (Aside: Will GM's, Ford's, Chrysler's CEOs now bring their private jets to fly back home to spite the Senate?)

Here's one I haven't heard before (though maybe that's because I haven't been able to follow the blogosphere that much lately):

1. Over the years, we had been hearing that US automakers were not making a good return (to say the least) on their auto-making side, but were making some profit on the financial side. This is taken today to mean that consumers didn't really want the cars they made if it wasn't for their very convenient, easily obtained financing. (Remember all those "0% financing" ads?)
2. Now we are all painfully aware that credit was so preposterously cheap in the last many years thanks to (lay-the-blame-where-you-will) set of circumstances which led to the non-pricing of risk.
3. So was the strategy US automakers used to survive this far just another side-show in the (market-failure induced) Cheap Credit main attraction?

(Keep in mind that "US cars" are, controlling for characteristics, already cheaper than "foreign" ones; and that more-expensive labor, for all it's blamed, has but a small effect on the final price of a car; see here, for example.)

In other words, now that the credit bubble popped, is there really a place left under the wintry sun for all three of GM, Chrysler, and Ford?

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POTUS, the chef of soulful chicken soup

After reading GWB's interview in the National Review Online , I've become convinced he missed his true call in life: author of self-help books (ok: of audiobooks in his case).

From the Mouth of POTUS:

This [compassionate conservatism] is a philosophy that most people adhere to... It wasn’t very well defended, but most people adhere to it. Compassionate conservatism basically says that if you implement this philosophy, your life would become better. That’s what it says. And that’s what it’s all about. It’s saying to the average person, this philosophy will help you make your life better. It’s the proper use of government to enable a hopeful society to develop based upon your talents and your success.

I can see a franchise in the making.

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My Kernel, My Null Revisited

The lonely tree in the Amazon rainforest that is this blog, it will attempt a return. Of sorts. Emphasis on "attempt."

Many things have happened since I stopped blogging. Work, for one, shifted up a gear or two (and I'm a ten-hour-day workaholic to begin with, so I'm not kidding here). But that's not the main reason.

Instead, it was a truly happy one, and this blog was sacrificed to the cause of my higher utility: I got married!

As an event, it was a true child of the global era, with receptions here, there, and everywhere; and then there was the most-god-awesomest honeymoon I could have ever wished/hoped/dreamed for/of.

In the meantime, I did achieve a couple of media victories: I now, once in a while (once in a long while), publish articles in the leading econ/business weekly magazine in Perú. And I was invited to blog for it too, although the whole guest-blogger thing is still very experimental for this publication, so we'll see how that one works.

Hopefully, this time around, there will be some economies of scope (or, as the kids say these days, "synergies") between those media efforts and this blog (though, unfortunately, none has still a thing to do with my day job); but that is yet to be seen.

(Sadly, both articles and blog are gated (the blogs are not even open to subscribers yet), so I cannot link to them from here. Anyway, my analysis there is, of course, written for readers in good 'ol Perú, so it wouldn't necessarily be that wow-inducing to readers outside.)

Returning to topic: while the dust did begin to settle at some point with the descent from the heavens above after the honeymoon, re-starting was forever postponed, never quite feeling I had managed to catch up with the edge of econ affairs at a time when everyone and their dog's uncle were talking about the same two things: global financial collapse and US elections.

People wholly focused 24/7 on these topics where writing all day, everyday about them. So why add echo?

And was there anything else to write about?

But publishing again made me nostalgic for my littlest Kernel, my beloved Null. Plainly sentimental reasons, then, to return.

And the repeat-optimizer than I am, I might reinvent this blog. We'll see how it goes.

I even changed the subtitle. Subtle, huh?

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Just for the heck of it

Agree or disagree, it's a conversation starter.

Source: Peter Brookes, TimesOnline

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