The Economy
*NEW*
Two new books I
read during this past summer:
Benjamin M. Friedman, The Moral Consequences of Economic Growth, New York: Alfred A.
Knopf (pub date October 25). This powerful book blends fascinating history,
solid sociology, keen politics with profound economic analysis to make its case:
growth rather than the level of living standards matters most in creating the Good
Society. The evidence Friedman brings to bear on this issue is most impressive,
because it covers long periods of time and many different countries as well as the
U.S.
Mac-Alain Quaknin, The Mystery of Numbers, New York: Assouline Publishing.
In addition to a crystal clear explanation of where numbers come from and how they
function, Quaknin provides lots of fun while he is teaching you fundamental mathematical
truths. He is also deeply religious and brings in plenty of mystic stuff about numbers,
from the psalms to the Koran, which you may or may not take seriously. But I could not
put this book down.
*NEW*
Brookings Papers
on Economic Activity, 2005:1, Brookings Institutioni, 1775 Massachusetts Avenue NW,
Washington, DC 20036. This is a fat volume, but it includes contributions by
such important economists as Ben Bernanke on the U.S. current account and the dollar,
Maurice Obstfeld and Kenneth Rogoff on global current account imbalances, and Paul
Krugman and Bradford DeLong on asset returns and economic growth. There is much in
these papers with which I disagree, but they are well worth the time as an insight
into academic thinking on these headline matters.
Urban
colossus: Why is New York America’s largest City? By Edward Glaeser, NBER
Working Paper #11398, National Bureau of Economic Research, 1050 Massachusetts
Avenue, Cambridge, MA 02138, June 2005. This fascinating history
explains why N Y C has been so much more successful than any other large city
outside of the sunbelt and why, over two hundred years, it has been the nation’s
premier metropolis. The secret of success, according to Harvard’s Glaeser,
started with New York’s overwhelmingly favorable geographic features, but that
was not enough. Success was equally the result of technological changes and the
Erie Canal that moved ocean shipping from a point-to point system to a
hub-and-spoke system. Even the South’s cotton moved to New York before being
shipped abroad. As a transportation hub, New York then become a natural
manufacturing center as well as a hub for financial and business services.
The strategic location was subsequently entrenched when New York became the key
hub for immigration as well.
Where
Ricardo and Mill rebut and confirm arguments of mainstream economists
supporting globalization, by Paul Samuelson, Journal of Economic Perspectives,
Vol. 18, No. 3, Summer 2004. This article is must reading. Samuelson
makes the case that even the most distinguished academic proponents of
globalization in today’s world are “dead wrong about necessary surplus of
winnings over losings,” a position that, Samuelson claims, he established as
long ago as 1972. Samuelson’s line of argument supports the most gloomy
prognoses. He demonstrates that “U.S. workers used to have a kind of de facto
monopoly access to the superlative capitals and know-how (scientific,
engineering, and managerial) of the United States. All of us Yankees, so to
speak, were born with silver spoons in our mouths... However, after World War II,
this U.S. know-how and capital began to spread faster away from the United
States. That means that in a real sense foreign educable masses... could and do
provide the same kind of competitive pressures on U.S. lower middle class wage
earnings that mass migration would have threatened to do... This will only grow
in the future.”
The dynamics
of the U.S. manufacturing sector: The churn of firms and jobs, by Danield
Meckstroth (chief economist of Manufacturers Alliance, or MAPI), in an address
to The National Economic Club, Washington, D C, May 26, 2005.
Meckstroth contends that the rate of plant closings within the manufacturing
sector has been relatively stable over a long period of time – despite all the
talk, there is no evidence of an accelerated rate of plant closures. The problem
in manufacturing is due to a drop in the number of plant openings, which accounts
for the declining number of manufacturing firms. There is no evidence of a
one-to-one transfer of plant production out of the U.S. into foreign locations by
larger manufacturers. Furthermore, the hiring and separation rate of workers in
manufacturing is lower than in non-manufacturing jobs. Much of the job churn
within manufacturing is due to quitting, but most of those workers find new jobs
in manufacturing. Lack of new hiring rather than massive layoffs explains the
decline in manufacturing employment. In short, those workers who have kept their
jobs are probably better off than workers in other sectors of the economy.
How much
equity does the government hold? By Alan Auerbach, Working Paper #10291,
National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge,
MA 02138, February 2004. Should contributors to Social Security have
equity accounts in order to earn higher rates of return over the long run?
Auerbach demonstrates the federal government, which is obligated to pay
Social Security pensions, is already heavily committed to the equity market
through its claims to future tax revenues from capital gains. The ability of
the Social Security system to meet its obligations, therefore, is already
highly sensitive to what happens in the stock markets.
Have
national business cycles become more synchronized? By Michael Bordo and Thomas
Helblng, Working Paper #10130, National Bureau of Economic Research, 1050
Massachusetts Avenue, Cambridge, MA 02138, December 2003. Based on an
analysis of sixteen countries over the past 125 years, the authors find a
secular trend toward increasing synchronization, regardless of changes in
exchange rate régimes. This is nothing new. Global shocks are dominant and
apparent across all of modern capitalist economic history.
External
constraints on monetary policy and the financial accelerator, by Mark Gertler,
Simon Gilchrist, and Fabio Natalucci, Working Paper #10128, National Bureau of
Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138, December
2003. In November 1997, I wrote a paper called “Pegs Lay Eggs,”
arguing that pegged exchange rates — and pegged anything — will
inevitably cause trouble as speculators bet against the solidity of the peg.
The peg gives them a free option. Milton Friedman, agreeing, responded
that “Eggheads create pegs.” The paper mentioned here demonstrates that
“welfare losses following a financial crisis are significantly larger under
fixed exchange rates relative to flexible exchange rates.”
Grasshoppers,
ants, and pre-retirement wealth: A test of permanent income, by Erik Hurst,
Working Paper #9544, National Bureau of Economic Research, 1050 Massachusetts
Avenue, Cambridge, MA 02138, November 2003. Hurst analyses spending
and saving behavior of people who enter retirement at different income levels.
He finds that people who retire at low levels of income had behaved differently
during their working years from people retiring with higher incomes. The
people retiring with lower incomes had raised and lowered their spending right
along with their earnings while they were working. People who retired at
higher incomes had followed the “permanent income hypothesis”: they saved less
when their incomes fell and saved more when their incomes rose, but their
consumption spending was much smoother.
Productivity
growth and the New Economy, by William Nordhaus, Brookings Papers
on Economic Activity,
2: 2002 (Brookings
is at 1775 Mass. Avenue, Washington, DC 20036). Nordhaus is one of
my favorite economists – a powerful mind, a lucid vocabulary,
extensive experience, and innate wisdom. This story on the productivity
process is an important document, which builds up the analysis on the
basis of an industry-by-industry structure instead of studying the
macro data. On balance, Nordhaus sides with those who believe that
the big increase in productivity in the second half of the 1990s was
concentrated in the productivity-producing industries themselves, such
as the computer industry and telecom. Nevertheless, he also finds that
a significant portion of the productivity gains during these years
occurred in retail trade, securities and commodity brokers, and wholesale
trade.
The
role of models and probabilities in the monetary policy process,
by Christopher Sims, Brookings Papers
on Economic Activity,
2: 2002 (Brookings is at 1775 Mass. Avenue, Washington, DC 20036). Anyone interested in how the Fed arrives at its forecasts and translates
them into decisions must read this important article by a leader in
statistical analysis. But the entire analysis of model structure and
the problems of making econometric forecasts relates to any type of
forecasting that relies on econometric methods, as most quantitative
forecasing in investing does rely. In addition, the main thrust of
this article is that the Green Book – the subjective forecasts
as opposed to the econometric forecasts – seems to have a better
track record than the econometrics.
Still
fettered after all these years, by Barry Eichengreen, National
Bureau of Economic Research Working Paper #9276,
October 2002. Eichengreen, a leading scholar in the field of monetary
history and the gold standard, looks at recent research on the Great
Depression relative to earlier work that placed much blame on the gold
standard. His review concludes that the big problem in the U.S. was
rooted in policy errors whereas the major source of disaster in Europe
were related to adherence to the gold standard.
Hi-tech
innovation and productivity growth: does supply create its own
demand? By Robert J. Gordon, Working Paper 9437,
National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge,
MA 02138, January 2003. This long and extensively documented study
argues that the hi-tech boom was a unique economic development, unlikely
to repeat for a long time to come. The basic conclusion is that the
rising supply of new hi-tech equipment did not create its own demand,
which was in any case temporarily swollen by the environment of the
bubble age. One important factor destined to slow the growth in demand
was the fact that the internet could be invented only once.
Does
income inequality lead to consumption inequality: Evidence and
theory, by Dirk Krueger and Fabrizio Perri, Working Paper 9202,
National
Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge,
MA 02138, September 2002. This is an important paper on an important
topic. Quite aside from the discussion, the paper documents cross-sectional
income and consumption in the U.S. over the past 25 years. Inequality
in incomes has increased much faster than inequality in consumption.
The difference evidently arises from high income volatility but the
use of credit markets to smooth consumption volatility.
Economic
contradictions coming home to roost? Does the U.S. economy face
a long-term aggregate demand generation problem? by
Thomas Palley, Journal of Post Keynesian Economics, Fall 2002. Palley answers the
question in his title with a strong YES! He contends that two decades
of rising consumer debt, the stock market boom, and rising profit rates
obsured deep-seated problems in the demand-generating process in the
U.S. These maladjustments relate primarily to the income distribution
and savings rates distortions that developed and have steadily worsened
since the early 1980s. Without policy measure addressed to these threats, “deficient
demand will reassert itself.”
The
mildest recession: Output, profits, and stock prices as the U.S.
emerges from the 2001 recession, by William Nordhaus,
Working Paper
8876, National Bureau of Economic Research, May 2002. Nordhaus – Professor
at Yale, former Chairman of the Council of Economic Advisors, and co-author
of Samuelson’s immortal textbook - provides more than interesting
evidence of the mildness of the recent recession. He concludes that “[T]he
forward-looking real return on equities is about equal to the riskfree
real rate of interest on medium-term U.S. government bonds. For those
who make their living in financial markets, this is not good news.
Stocks are still overvalued relative to most of the postwar period.”
