Lessons of the Recession

Raghuram Rajan's book, FAULT LINES, is one of the best books I have read concerning the causes of the Great Recession. He now has an article in FOREIGN AFFAIRS that brings it forward. He goes over some ground covered in his book, arguing that the United States and other developed nations distorted markets for a couple of decades by making credit very accessible.  People's spending increased even as incomes didn't increase as much.  The bursting of the housing bubble induced households to deleverage, which was necessary.  For some of the European countries, it was government spending more than household spending that took place in the 15 years prior to the crash.  In neither case, Rajan argues, is the answer to increase government deficit spending.  We need to address the longer term problems.
Rajan's arguments run counter to the view that this is not the time to take the long view. We need to stimulate in order to get growth going. Once growth is back, then we can address the longer-term problems. Rajan argues against this on the grounds that the prosperity we had was not sustainable.  Further, the history of public policy has been to ignore the problems when we have prosperity.
He writes, "Fiscal austerity is not painless and will probably subtract from growth in the short run. It would be far better to phase reforms in over time, yet is is preceisely because governments did not act in good times that they are forced to do so, and quickly, in bad times. Indeed, there is a case to be made for doing what is ncessary quickly and across the board so that everyone feels that the pain is shared, rather than spreading it over time and risking dissipating the political will."
The whole piece is worth reading.

On Faith-Based Retirement

Joe Nocera, a columnist for the New York Times, wrote an op-ed piece Sunday about his retirement account. As he approaches 60 and acknowledges his mortality, he opines that the idea of people handling their own retirement accounts is a bad one. In fact, he quotes a behavioral economist, Theresa Ghilarducci, who said, "The 401(k) is a failed experiment. It is time to rethink it."

What evidence does Nocera cite? Primarily his own experience.  He writes about how the tech bubble that burst in 2000 cut his 401(k) in half. Then, a divorce a few years later, cut it in half again. Then, he says, he threw another chunk of his 401(k) into a renovation on his house. (He doesn't say whether his house value has fallen lately.) 

Nocera is a couple of years younger than I am.  I actually started the process of saving for retirement later than he did, since military service and graduate school didn't provide opportunities to save.  I taught at Miami University for three years, but took my portion out to help with moving expenses to Louisiana, so had nothing accumulated. I spent nine years at LSU and had about $50,000 in a 401(k) when I left. So, essentially, I started saving for retirement about 43 years of age.  I also experienced the fall in the market in 2000 and the more drastic fall in 2008.  Yet, it appears I have much more saved than Mr. Nocera.  Admittedly, I don't live in a high-cost city like New York. But I also haven't written several books that generate royalties, which can also allow one to increase the amount saved in a tax-deferred account.

He suggests in his column that we may need to rethink retirement plans.  Several people commented on his column on-line in the Times. Some were critical of his decisions and others argued we need to return to pensions.  But, have people not read about how many pension plans are underfunded?  One of the major problems of GM prior to its bailout by the federal government was their pension liabilities.  We also know that many states' pension plans are underfunded.  Many still are assuming a 7 or 8% growth rate, which is almost impossible to get right now.  The pensions liabilities of many state and municipal governments are likely to be a huge problem in the future.  Politicians clearly like making promises without worrying a lot about how they can be met in the future. 

Finally, public policy should not be based on anecdotes--either his or mine.  More systematic analysis is needed.  Then there is the question of how much we should be a nanny state and how much we should expect ourselves and our fellow citizens to take care of themselves?

Professor Krugman on Chairman (Professor) Bernanke

I don't agree with Paul Krugman often; although when  he focuses on economics rather than politics, the odds of agreement increase.  The New York Times published an excerpt from Krugman's new book concerning Ben Bernanke.  As an aside--Bernanke was chair at Princeton when Krugman moved to Princeton.  Krugman argues that Chairman Bernanke should listen to Professor Bernanke.  Bernanke's scholarly work centered on the Great Depression, and he is considered one of the leading experts on the causes and consequences of the Great Depression.  He also wrote about Japan's economic woes that began in the 90s, and urged the Bank of Japan to be more aggressive.  He suggested several things that the Bank of Japan could have done but didn't.  Krugman notes that Bernanke's Fed has also not done some of these earlier recommendation. 
I am less confident on the Fed's ability to do more than it has than Krugman, but he may be correct that the Fed has been too timid.  It is curious that Bernanke has not attempted policies he recommended while an academic.  Krugman offers a couple of reasons why Bernanke may be more cautious in his article.  One is that he is adapting to political pressures. While it is true the Fed is supposed to be independent of political considerations, Fed officials also know that Congress can change the rules.  Another is that the Fed bureaucracy got to Bernanke when he was newly on the Board.
I think a third possibility exists.  It is one thing to write academic papers and make recommendations.  It is another to implement untried policies in the real world where unintended and unknow consequences may follow.  A former professor of mine left academia and became an economist for a business. I saw him a couple of years later, and he commented that it often was daunting.  As he put it, "It's tougher when real dollars at stake and not hypothetical dollars represented by a diagram on a blackboard."
Krugman's article can be found here.

Apple and Taxes

The New York Times today has a long and detailed article on how Apple, the most profitable company in the U.S., pays little taxes as compared to most non-tech firms.  The key idea is that Apple is able to locate parts of its company where revenue is generated in low-tax areas. Nevada rather than California, for example.  So, while a firm like Wal-mart pays about a 20% tax rate, Apple pays less than 10%.  Apple is able to use both states in the US and other countries in this process of minimizing taxes.  The things Apple and other tech firms can do cannot be replicated by more standard businesses where it is diffiult to relocate production facilities.  Perhaps the Occupy Wall Street folks should think about occupying Apple. They can use their Iphones to organize their activities.

An interesting reflection on Milton Friedman on the 100th anniversary of his birth by Allan Sanderson.  The link is here: http://www.milkeninstitute.org/publications/review/2012_4/79-84MR54.pdf.

Busy Week for Economic Data

There is an interesting article in Business Insider today.  It provides a daily listing of the economic data announcements, central bank meetings, and so on for the week. It will be a busy week, indeed.  The first Friday of the month is usually a big deal with the employment report from the Dept. of Labor. Given the tepid GDP growth for the first quarter, I expect the employment numbers will not be great.
Given all that is going on in Europe, the article also highlights a few European items.  There, the big one may be the French election on Sunday.  If Hollande wins, there will be increased tension in the French-German relationship in the EU.

Is the Collapse of the European Union a Realistic Scenario?

Martin Schulz, president of the European Parliament, said that the collapse of the European Union is a realistic scenario.  As president of the parliament, he is certainly an advocate for greater centralization of power in the EU.  For the average European, I believe, the goal is to have the gains from an economic union but they do not want a political union.  As I indicated in a recent post, I think the push for the single currency fifteen years ago was based more on political than economic goals.

Schulz attributed the danger to rising xenophobia and nationalism in the member nations.  But the pressures caused by the sovereign debt problems in Greece and Spain are not the result of xenophoba--there are more the result that Greece has no business in a monetary union with Germany.  Either Greece needs to pull out of the euro or increased political coordination is needed. That is, the EU becomes more like a United States of Europe with more spreading the wealth across borders.

Another point made by Schulz involves the mobility of people across borders.  France and Germany have suggested alterations to the Schengen treaty so a country can reimpose border controls for a longer period of time without EU approval.  They say they fear illegal immigration as countries like Greece have a harder time controlling illegal entry into their country. If someone enters Greece illegally, they can then without trouble travel to Germany. This obviously is similar to the US where if someone gets into Texas they  can then travel to Michigan without facing border guards.  To the extent that illegal aliens is the concern, Germany and France may have a point. On the other hand, perhaps they really want to keep unemployed in Spain from coming to France looking for work.