Over at Equitable Growth: Things I Should Have Written About When They Were Published: Lawrence Summers on ‘House of Debt’: Daily Focus


Over at Equitable Growth: Lawrence Summers: On ‘House of Debt’: "Atif Mian and Amir Sufi’s House of Debt, despite some tough competition...

...looks likely to be the most important economics book of 2014; it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession.... It persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasises the breakdown of financial intermediation, is inadequate. It then goes on to provide a supplementary and in some ways alternative explanation focusing on the deterioration of household balance sheets, an analysis that has profound implications for policy directed both at preventing crises and responding to them when prevention fails.... READ MOAR

It is a summary of a highly serious programme of economic research--one that is in many ways a model for what economists should do.... They argue that, rather than failing banks, the key culprits in the financial crisis were overly indebted households. Resurrecting arguments that go back at least to Irving Fisher and that were emphasised by Richard Koo in considering Japan’s stagnation, Mian and Sufi highlight how harsh leverage and debt can be....

Their analysis, presented with far more depth and subtlety than I have been able to reflect here, is a major contribution that furthers our understanding of the crisis. It certainly affects what I will examine in trying to predict and forestall future crises. And it should influence policies aimed at crisis prevention by demonstrating the insufficiency of keeping financial institutions healthy and by making a case for macroprudential measures directed at preventing runaway growth in household debt.

When one has a persuasive and novel idea, there is an inevitable temptation to push it a bit too far and to weight it excessively relative to less novel truths. Mian and Sufi succumb to this temptation in the last third of their book, where they discuss the policy responses to the crisis...

Economists--well, sane economists who have done their homework--divide into three groups on the causes of the deep and long Lesser Depression:

  1. Those who believe it was the attempted regulatory arbitrage by the major universal money-center banks and their consequent collapse when the housing bubble collapsed that destroyed financial-center risk tolerance and the credit channel. (I tend to be in this camp, most of the time at least).

  2. Those who believe that even if the financial-market collapse of 2008-9 had been properly handled (i.e., no uncontrolled Lehman bankruptcy, etc.), we would still be on the same track unless we had dealt with the enormous overhang of bad housing-purchase and home-equity loans created by the collapse of the housing bubble. (Mian and Sufi are in this camp. I am sometimes in this camp.)

  3. Those who believe that even if housing finance and high finance had been better handled, we would still be on the same track because it was the collapse of housing wealth and its knock-on effects on consumption spending that are at the root. (Dean Baker tends to be in this camp.)

I must confess that as time passes and as single-family housing construction continues to fail to recover, I find myself shifting from (1) to (2), or perhaps from (1) to (1) and (2)...

Over at Project Syndicate: Economic Growth and the Information Age: Daily Focus

2014 11 24 Mo DeLong CEEI key Over at Project Syndicate: Last month in this space we reviewed the pulling-apart of America as it has become a vastly more unequal place since 1979:

  • top 1% incomes grew at 3.6%/year,
  • rest of the top fifth grew at 1.6%/year,
  • middle three-fifths grew at 0.9%/year,
  • bottom fifth at 0.5%/year-—with the proviso that improved access to medical care was worth a good deal more than its market cost.

But the past generation has seen a third industrial revolution, a worthy information-age successor to the first of steam, iron, cotton, and machines and to the second of internal combustion, electricity, steel, and chemicals. Not everyone, but almost everyone in the North Atlantic and many and soon most in the world, can now if they wish have a smartphone--and so gain cheap access to the universe of human knowledge and entertainment to a degree that was far beyond the reach of all but the richest of a generation ago.

How much does this matter? How much does this mean that conventional measures of real income and real standard of living understate how much we, even the relatively poor of we, have progressed toward utopia?

The conventional economic growth accounting tells us that consumption expenditures on telecommunications, information processing, and audiovisual entertainment are 2% and net investment in information processing equipment and software 3% of output. That means that a price fall of 10%/year in that category of high-tech goods contributes 0.2%+0.3%=0.5%/year to economic growth in standards of living. The problem is that the bulk of that increase is already in the estimates. The share of spending has to signficantly underestimate the marginal salience of information-age goods and services in human well-being in order to make the argument that this third industrial revolution is a boost above rather than an important component of measured modern economic growth.

Now it is plausible that this is the case. Human well-being requires not just the expenditure of money purchasing goods and services but the use of the time that is the stuff of our lives to utilize those goods and services properly, and time is along with money a very scarce resource. And information-age goods and services, because they require our attention, are time-intensive. Suppose—a reasonable guess--the coming of the broadband internet since 1999 has doubled the utility that humans get out of the two hours a day that those of us in the North Atlantic typically spend interacting with our audio-visual technologies. Those two hours are one-fifth of the time we spend awake that is our own, and not our bosses’. That’s an extra 0.6%/year in growth of standards of living since 1990—much bigger than the 0.2%/year that the growth-accounting cost-based literature leads us to.

However, such a calculation requires that we be or become the type of people whose lives are truly enriched by our kindles and our tablets and our computers and our smartphones—that we value Netflix and Youtube and Google’s window into the online library of humanity and Facebook and the rest as massively superior to the ways we previously learned, gossiped, listened, and watched. It is certainly true that we today have information-age capabilities that are literally those of kings in the past: if in the seventeenth century you wanted to watch “MacBeth” in your house, you had better be named James Stuart, have William Shakespeare and his acting company on retainer, and be King of England and Scotland so that you could have a full-sized theater in your palace of Whitehall. And ever since Homer chanted his “Iliad” around the campfire after dark we have been willing to pay through the nose for our culture of stories and information.

Yet not all of us are all that devoted to our FaceBook friends. And much of what many of us desire goods and services for is as indicia of relative status. Perhaps the right way to view the situation is that before the information age began our estimates of economic growth overstated true reality by perhaps 0.5%/year as the extra well-being we got from increased real wealth and income was offset by our noticing that the Jones’s next door had more, better, and newer than we did? Perhaps the right way to view the situation is that those parts of the information age that escape conventional growth-accounting calculations simply neutralize those forces of envy and spite that were never included in the calculations in the first place? That is my tentative judgment--or rather guess--today.

791 words

The Fed’s Black Swan

This CNBC article starts off with the usual pablum about interest rates and how the Fed may decide to hold off beyond next spring given the lack of inflation expectations and effects in the economy. It’s brain melting mainstream media Pap 101. Fed now expected to stay lower for a lot longer Really? Ya think? […]

Surprising Pockets of Weakness in the U.S. Stock Market

Recent posts have focused on continued net strength in the stock market.  Friday's shortened session was an interesting one, however, given the significant weakness in the oil market.  Energy and raw materials shares sold off sharply, even as the SPX hovered near all-time highs.  As you can see from the top graphic from the excellent Finviz site, we've seen an unusual divergence in performance between consumer-related sectors and commodity-related ones.  The weakness in energy-related shares in particular contributed to a situation on Friday in which 841 stocks across all exchanges closed at one-month highs, but 615 closed at fresh monthly lows.  That's the highest level of monthly lows since the October bottom.

As the bottom three charts reveal (credit to the ever-informative Index Indicators site for these), growing weakness has not been limited to the energy shares.  When we look at the large cap average (SPY; second chart from top), we see many stocks making new 20-day highs over lows and prices near all-time highs.  Midcap shares (MDY; second chart from bottom) have also made new highs, but only marginally so.  Among the midcaps, 20-day new highs and lows were about even on Friday, well off the levels reached at the end of October.  When we turn to the small caps (IJR; bottom chart), we can see that fresh 20-day lows outnumber new highs and are well off the late October peaks.  Note that the small caps have yet to make a fresh yearly high--quite a contrast from the large cap strength.

Recent posts have stressed that it takes more than a pullback of buying interest to sink a rising market:  we need to see outright evidence of weakness.  Not only among energy stocks, but also the smaller caps, we're starting to see such weakness.  I couldn't help but notice on Friday that 128 stocks in the NYSE universe closed above their upper Bollinger Bands, an above average reading.  A total of 300 stocks, however, closed below their lower bands.  

That is not supposed to happen in markets sitting near their highs.

Further Reading:  Market Strength vs. Weakness

Podemos „Economic Manifesto“ Calls for Debt Restructuring, Spain to Abandon the „Euro Trap“

The Podemos party, a far-left populist party in Spain led by Pablo Iglesias, has come from out of nowhere to lead the polls.

Podemos' economic manifesto includes debt restructuring, exiting the European Monetary Union, and a jobs program to end unemployment.

The plan was drawn up by Vincenç Navarro and Juan Torres, two Spanish economists.

Pablo Iglesias (party leader), Carolina Bescansa (party member) and economists Vincenç Navarro and Juan Torres, present Podemos' economic program.

Via translation from Libre Mercado, Podemos Admits Its Economic program Unfeasible Under Current Euro.

Globalization and National Sovereignty Incompatible

The document includes harsh criticism of globalization, stating  "democracy, national sovereignty and global economic integration are mutually incompatible."

Euro Trap

"Besides being quite integrated into the global economy, Spain is mostly integrated in the euro monetary union and this also represents a first order constraint when developing an economic program of government."

"Our membership of the single European currency means, as is well known, that do not have essential instruments of economic policy, as control over the amount of money or the external value of the currency. But not only that. It also means that other instruments which in principle could be at our disposal, such as fiscal policy and sectoral policies can only be used with great limitations and in some cases with hands completely tied."

"Spaniards should be aware that it is physically impossible that they can pursue policies that meet the national interest, within the euro as it is designed. Should know that the euro was conceived as a real trap, but nowhere is it written that people have to accept it without further."

Debt Restructuring

"Debt restructuring, especially the peripheral countries, is not a whimsical proposal but the result of a cooperative strategy which is much more favorable than that imposed so far and that can end a crisis far more serious and widespread. The only possible way out of this vicious circle is genuine restructuring of European and Spanish debt."

Job Creation Program

"Work towards full employment should be a priority of the government.  This can be achieved by stimulating the private sector, and where this is not enough, through job creation by the state to correct the huge deficit of social infrastructure including the expansion of public services of the welfare state, now clearly underfunded in Spain."

"If Spain had one person in five in public services, as did Sweden in 2010, there would be more than three million and additional jobs in our country."

Mish Comments

Other than to call for Spain to abandon the euro, Podemos' economic manifesto is economic nonsense. However, the manifesto is bound to have popular appeal.

Everyone likes to believe in the Keynesian free lunch concept. It's logical to expect some country in the eurozone is going to at some point be willing to try just that.

I keep repeating... "Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the bail out debt foisted on their country to be null and void. That person will be elected."

It's quite possible Pablo Iglesias is just that person.

Mike "Mish" Shedlock

Comments on Stephanie Aaronson: Labor Force Participations: Recent Developments and Future Prospects

Discussion of Stephanie Aaronson: Labor Force Participations: Recent Developments and Future Prospects:

Robert Hall:

  • Unemployment is a suspicious or rather contaminated measure of economic slack in today's economy
  • Janet Yellen: "If the cyclical component is abnormally large relative to the unemployment rate then it might be seen as an additional contributor to labor market slack"
  • Does a soft labor market discourage workers? The traditional belief is "very little"
  • Observed: non-participation rate n and unemployment rate u. Unobserved factors: slack s, and non-participation influence x.
    • n = x + γs
    • u = s - αx
    • s = (u + αn)/(1 + γa)
  • This is a problem--but to answer it needs an instrument, which we do not have...
  • The discussion has neglected the fact that we need to overshoot on inflation in order to create credibility that we will do the right thing the next time we hit the ZLB...

Jim Stock:

  • Aaronson: pure aging 1.6%, cyclical 0.5%, other 1.1%--total 3.2% * What is the residual?: Special cyclical factors from this regression? Non-aging structural shifts?...
  • All of Aaronson's residual has emerged since 2011:QI...
  • Mean duration of unemployment accounts for all of residual through 2012 and half through today...

Justin Wolfers:

  • When you have age and cohort effects you fit every time series... * Given the way they define the cycle, there cannot be any scope for a cyclical recovery in participation because right now there is next to no cycle...

Noted for Your Lunchtime Procrastination for November 30, 2014

Screenshot 10 3 14 6 17 PMOver at Equitable Growth--The Equitablog


Must- and Shall-Reads:

And Over Here:

  1. Justin Fox: Andy Haldane: The Regulator Who Explained the World: "The Haldane trademarks: a framework in economic theory, references to the latest in empirical research, grand historical sweep, and crystal-clear explanation... [plus] the subversive element found in the best of Haldane's work.... His Sept. 2, 2010 speech "Patience and Finance"... bowled over by how good it was.... 'Under one equilibrium, patience wins the day. When long-term investors start in the ascendency, prices tend to correct towards fundamentals. The performance of untested investors pursuing momentum strategies falters, while those pursuing longterm strategies flourish. The fraction of long-term investors rises. The self-correcting tendencies of market prices are thus reinforced, further supporting long-term investors. The patience gene thrives, the impatience gene dies. Natural selection results in a self-improving cycle, as with dieting, happiness and exercise. But there is a second equilibrium where this cycle operates in reverse gear.... Natural selection results in a self-destructive cycle.'.. Haldane then goes on to meticulously document the ways that, over the past decade, financial markets--especially in the U.S. and UK--succumbed to the impatience cycle.... Another Haldane speech 'The Short Long'... 'Control Rights (and Wrongs)'.... As somebody who has long trafficked in explanatory financial journalism, I stand somewhat in awe..."

  2. Marion Fourcade et al.:: The Superiority of Economists: "The dominant position of economics within... the social sciences in the United States... the relative insularity of economics... the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and in the confidence they have in their discipline’s ability to fix the world’s problems. Taken together, these traits constitute what we call the superiority of economists, where economists’ objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists’ practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision."