Month: April 2015

…My subtitle was rejected by one of the co-organisers, namely Larry Summers. He argued that I was far too optimistic, that we were nowhere close to knowing where were going. Arguing with Larry is tough, so I chose an agnostic title…. We are indeed proceeding in the trenches. But where the trenches are eventually going remains unclear…. Let me start with macroprudential tools. If anything, the Crisis has convinced most of us that they have to be part of the basic macro toolkit…. But where are these trenches going? We do not know the shape of the future financial system, for example the degree to which it will be institution/bank based or market based. Sure, the same uncertainty applies to, say, the high-tech sector, and we do not worry; we just observe, and we shall see where it goes. But finance is different. Policymakers cannot be simple observers, as what the financial system will be depends very much on regulation. And we do not have a good sense of what regulation should be…

…The U.S. and the U.K… were tripped up every 10 to 20 years by financial crises and economic depressions…. [Since] 1978, when the Chinese Communist Party ‘shifted its center of gravity from propagandizing class struggle and organizing political campaigns to economic construction,’ China is now in its 37th straight year of economic expansion…. China adopted a radically pragmatic approach to governing. If something resulted in economic growth, it was a good policy. The only real limit was that the supremacy of the Communist Party could not be challenged… [a] strange blend of Communist-Party corporatism, Keynesian macroeconomics and Schumpeterian entrepreneurialism has delivered spectacular improvements in living standards and similar gains in national clout…. Delivering steady economic growth has become the key source of its legitimacy, so it will keep doing whatever it can to deliver. And, given how painful an outright Chinese recession would be for the sputtering global economy right now, we’re kind of stuck with rooting for it to succeed.

…I wonder whether it’s making the issue more complex than it needs to be…. The financial stability group… are all permahawks. Taylor and the BIS have often argued that money is too loose; have they ever, at least in the past two decades, argued that it is too tight?… But if monetary policy is too expansionary on a sustained basis, surely we expect to see accelerating inflation. And there have in fact been repeated warnings from this group that inflation is about to take off. But what we see instead is this:

You might expect some rethinking, given this absence of inflationary trouble to materialize. But the only rethinking that seems to happen is a search for new reasons to make the same complaints about loose money….

[And] if it’s really that easy for monetary errors to endanger financial stability — if a deviation from perfection so small that it leaves no mark on the inflation rate is nonetheless enough to produce the second-worst financial crisis in history — this is an overwhelming argument for draconian bank regulation…. Strange to say, however, I don’t seem to be hearing that from Taylor or anyone else in that camp. It’s all very odd stuff…

… the mother of all lies. The Great Recession was caused by the banks. Governments, the Labour government included, by bailing out the banks and continuing to spend, stopped the Great Recession from turning into a Great Depression. Yet practically everyone seems to believe that the Great Recession was manufactured by Gordon Brown. The Conservatives claim that ‘by halving the deficit we have restored confidence to the economy’. This cheerfully ignores the near academic consensus that their deficit-reduction policies over the last 5 years have made the British economy between 5 and 10% smaller than it would have been with more sensible policies…. The Conservative narrative has become the Overton Window of our day, outside of which policies are unthinkable. But sooner or later reality will break in, and what is now unthinkable will become sensible again. But not in this election.

…Recent evidence shows that the reform boosted payments to physicians from private insurers by 13% relative to other areas. This increase began immediately before the reform became law, suggesting that insurers raised payments in anticipation of the change. The reform may have also caused the state’s insurance premiums to fall. Overall, evidence suggests that the Massachusetts health-care reform shifted dollars away from insurers and towards providers and consumers.

…labor market slack cannot be gauged solely in terms of the conventional measure of the unemployment rate (that is, the number of individuals who are not working at all and actively searching for a job). Rather, assessments of the employment gap should reflect the incidence of underemployment (that is, people working part time who want a full-time job) and the extent of hidden unemployment (that is, people who are not actively searching but who would rejoin the workforce if the job market were stronger). In this paper, we examine the evolution of U.S. labor market slack and show that underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap. Next, using state-level data, we find strong statistical evidence that each of these forms of labor market slack exerts significant downward pressure on nominal wages. Finally, we consider the monetary policy implications of the employment gap in light of prescriptions from Taylor-style benchmark rules.

…price and wage divergence and an insufficient focus on debt sustainability. During the crisis, the main problems were slow resolution of banking problems, an inadequate fiscal policy stance in 2011-13 for the area as a whole, insufficient domestic demand in surplus countries and slow progress with structural reforms to overcome past divergences…. Euro-area governance… should establish institutions to prevent divergences of wages from productivity… a European Competitiveness Council… and the creation of a Eurosystem of Fiscal Policy (EFP) with two goals: fiscal debt sustainability and an adequate area-wide fiscal position. The EFP should have the right in exceptional circumstances to declare national deficits unlawful and to be able to force parliaments to borrow more so that the euro-area fiscal stance is appropriate…. In the short term, domestic demand needs to be increased in surplus countries, while in deficit countries, structural reform needs to reduce past divergences.