John Cochrane on Geitner's Proposal at the G-20

Today's WSJ has an interest op-ed piece by John Cochrane. Secretary of the Treasury Geithner called for G-20 countries to undertake policies that would reduce external imbalances below some specified share of GDP. It appears that Geithner is most concerned about China's trade surplus with the U.S. However, the U.S. has a trade deficit with many countries other than China.

China saves a lot more that the U.S., partially because China lacks a social security system. The only way middle-aged adults can plan for retirement is by saving today. It often appears that Americans believe social security provides a better retirement than it does since so many don't save much. However, one positive outcome of the recent financial and economic crisis is that Americans are saving more and borrowing less.

Cochrane points out several problems with Geithner's proposal. First, how does anyone know the proper amoung of saving any given country should have? Second, countries at different levels of development will have different outcomes with respect to trade balances. The U.S. borrowed abroad to fund the railroads in the 19th Century. Cochrane also points out that promises to fix our long-term problems later are hardly enforceable. Finally, there is a strong notion of an ability for government and international agencies to plan the operation of modern economies.

Cochrane's piece is worth a read.

Two Links of Interest

Saturdays WSJ had an interesting op-ed by Joseph Stiglitz on why quantitative easing will not succeed. The linkages between quantitative easing and business activity are tenuous, which seems to be the case to me as well.

On a different area, Bernanke gave a talk today about housing markets. His written remarks are here.

Bernanke's Speech

Here is the link to the speech Bernanke is giving at a conference for the Boston Fed.

Krugman on Stimulus--Again

Krugman's op-ed piece in the Times today argues that the claim that the Obama administration tried a massive stimulus plan and it didn't work is wrong. In fact, the stimulus plan was not large enough and much of the plan was not federal government spending. Instead, it was tax cuts and grants to states to make up for the lost revenues states faced. Much of what he says is true. In posts I did at the time of the stimulus, I argued that much in the stimulus bill was not stimulus. Instead, it was spending on programs that Democrats wanted but didn't put in the regular budget.

Krugman also argues that when people think of Obama as pushing big government, they don't have any massive new programs to point to. Here, it is clear that no matter how smart Krugman is, he doesn't get some basic ideas that people have. Krugman notes that the health care bill hasn't really kicked in yet so there is no new bureaucracy in place yet. True, but people anticipate there will be. People see that the focus of the administration had not been jobs but programs long held dear by Democrats in Congress, especially health care. The stimulus bill, as already pointed out, also included many things that may or may not be good, but could not be considered stimulus spending. People see that, for all the rhetoric from the administration, the focus of the administration was on programs long sought after by Democrats and not economic recovery. Krugman misses the point because he shared the same desire for the programs pursued by the president.

Two interesting articles

Two interesting pieces in the business section of the NY Times yesterday. Mankiw's column illustrates the effects that higher taxes on high-income earners can have on work effort. He uses himself as a case study. An article on the historical gains of the stock market after the midterm elections provides astonishing data. The article writes about the data from the perspective of it being the third year of a presidential term, but data I received from a former student showed that the 200 days after the midterm election consistently had high returns while the 200 days prior to the midterm elections returns were much lower, with many years showing negative returns. It is difficult to know what to make about the data.

Can the Obese Eat Their Way to Good Health?

David Wessel's column in today's WSJ discusses the need for more action on the economy. He discusses how there are three views--more stimulus is needed now, stimulus didn't work so have to rely on Fed, and the worry over debt so the need for austerity. He opts for more short-term stimulus combined with credible longer-term deficit reduction. He concludes with noting that financial crises tend to recover slowly, "But is this really the best we can do?"

I don't know if it is the best we can do or not. But, is his solution of short-term stimulus and credible long-term austerity does not seem realistic to me. In theory, one can make a case for it. But what would constitute credible long-term deficit reduction? Congress is expert at promising things long term that either never happen or are changed later due to some new crisis.

Given that many have used medical analogies, I will try one also. For example, I have read where people say that a doctor would be remiss not to do all that is possible for a cancer patient. Agreed. But what if our sick economy is more like health issues related to obesity? It would be wrong to keep feeding the patient to alleviate a symptom since the basic problem is obesity. Similarly, if the problem was too much leverage and debt, then more debt may not be the prudent action to take.

Adam Smith's Marketplace of Life

I just finished reading Adam Smith's Marketplace of Life by James Otteson. I recommend the book highly. Otteson is a philospher who looks carefully at Smith's Theory of Moral Sentiments. He argues that Smith developed a theory of markets to explain the evolution of moral actions and codes in a society, that later enabled to explain the operation of economic markets in The Wealth of Nations. The same approach underlies both books. Otteson uses the term marketplace rather than the more common term, "spontaneous order." The idea is the same though.

I will be teaching the History of Economic Thought for the first time next semester, and Otteson's book is a great resource in preparation for the class.