Archive for the ‘WSJ Alerts’ Category

WSJ Alert (335/402): AIG Primer

March 26, 2009

As budding economists, it is important to be able to apply your new tools to topical questions — like whether outrage over AIG bonuses is justified.   You know my view (which is fairly representative of economists).  Note, however, I made an implicit assumption — the marginal benefit of satisfying the public’s demand for social justice was less than the marginal cost.  Put another way, I assumed the increase in equity by any reasonable metric was less than the efficiency cost.  Put still another way, the reduction in the size of the economic pie likely to result from clawing back AIG bonuses was not worth the additional social justice produced by a more equal slicing of that pie.  All this said, some liberal economists could reach a different conclusion because they think the marginal benefit is larger than I do.

So you need to make up your own mind.  (I expressed my strongly held view in class not to convert you but to prod you into making up your own mind — “Oh yeah, I’ll show him.”)  Accordingly, here is a list of related articles.

  1. Washington Post story with background: Inside AIG-FP, Feeling the Public’s Wrath
  2. Dealbook column from the New York Times: The Case for Paying Out Bonuses at AIG
  3. Holman Jenkins column from the Wall Street Journal: The Real AIG Disgrace
  4. Resignation letter from AIG-FP executive, published as op-ed in the New York Times: Dear AIG – I Quit
  5. Post from Becker-Posner blog on pay caps for bankers: Against the Pay Caps–Posner
  6. Another post from Becker-Poster on pay caps for bankers: Pay Controls Do Not Work at Any Level-Becker

DISCLAIMER: I could not find articles/posts by mainstream economists making the case for clawbacks.  (I invite you to dig and send me anything persuasive you find.)  I offer a disclaimer so you won’t think — “Hey, this guy wants us to make up our own minds but then stacks the deck with readings from one side.”   As you read #1-6, you might want to outline an answer to the following essay question:  What is the economic case against clawing back AIG bonuses?  Such a question could loom in your future (hint hint).

Finally, here is an ABC News story (not required – “further reading” stuff) on political contributions made by AIG: Will Obama, McCain, Dodd Return Contributions From AIG Employees?

Posted at 12:30 CDT

WSJ Alert 7 (335/402): What is to be done?

February 21, 2009

Post title is taken from a 1902 pamphlet by Lenin calling for a revolutionary vanguardist party to direct the working class.  He argued workers, left on their own, would settle for trade unionism, so a focused party was needed to bring revolution.

Well now…  Seem to be having similar arguments about banks: Nationalize or “settle” for less?  You must prepare, comrades (smile).

Here is an WSJ piece (2/21, A1) with background: U.S. Seeks to Stem Bank Fears.  Here is an WSJ interview (2/20, online only) with a pro-nationalization NYU economist, Nouriel Roubini: WSJ – Nationalize the Banks. Here is an opposing view from Willem Buiter at the LSE (WSJ, 2/21, A11): ‘Good Banks’ Are the Cost Effective Way Out of the Financial Crisis. Note: Because you have an upcoming exam, this will be the only WSJ Alert for the 2/25 quiz.

Related “Further Study” Material (i.e. not quiz-worthy)
Gary Becker and Richard Posner discuss pay caps for bankers; neither is a fan.  Here are links: Posner on Caps and Becker on Caps.

Just for Fun
If you need music to read by, follow the link: Internationale – Moscow Radio Chorus. The Internationale is the anthem of international socialism, sung traditionally with a raised hand in clenched fist salute. (It is also the ringtone on my Bank cell phone, seriously). Here is more info (including lyrics): Wikipedia – The Internationale. Note: In case it is not clear, I do not think nationalization of U.S. banks is tantamount to communism.  I am poking fun at hysterical reactions.

Posted at 10:10 am

WSJ Alert 6 (335/402): Unmployment & Crisis

February 9, 2009

Last Friday, as I am sure you have heard, the Bureau of Labor Statistics (BLS) released new unemployment numbers – up from 7.2% in December to 7.6% in January.  Here is the official release: BLS News Release – January 2009 Unemployment. Here is WSJ report (2/7, A1): Soaring Job Losses Drive Stimulus Deal.

Looking at employment, rather than unemployment, yields an even bleaker picture: Employment Numbers Approaching 1982 Lows.   By the way, Bob Hall is a macroeconomist at Stanford.  You can click on “Woodward and Hall” link for bios.   One goal of WSJ Alerts, as you may have gathered, is to introduce you to leading macroeconomists.

As grim as the numbers were, the mainstream media would have you believe the mob is already in the streets.  Here is a re-write of the AP report on unemployment by Russ Roberts (who used to teach in the WU business school): They Report, I edit, you decide.

Here is a link to an op-ed from today’s WSJ (A19) by John Taylor: How Government Created the Financial Crisis.  Taylor is another Stanford macroeconomist.  He is known in particular for the “Taylor Rule” — an approach to monetary policy that marries rules and discretion.  Here is a brief introduction (from the San Francisco Reserve Bank’s “Dr. Econ” page): What is the Taylor Rule?

Two closing notes: There has been so much great stuff in the press/on the net that it has taken discipline to keep from burying you (smile).  I will post later today with the week’s “greatest hits” – under Further Study.   Also, most links to date have been critical of the stimulus package and skeptical of mainstream accounts of the financial crisis.  I am not trying to brainwash you (okay, maybe a light rinse — tee hee).  The best stuff from an economic-analysis standpoint right now is contrarian.  Also, contrarian treatments provide nice balance for “End of the World as We Know It” articles in the mainstream media.  (See Russ Roberts post above for example.)

Posted at 9:49 am

WSJ Alert 5 (335/402): New Deal/Raw Deal?

February 3, 2009

Link to op-ed from yesterday’s WSJ (2/2, A17) by Harold Cole/Lee Ohanian (econ profs at Penn and UCLA, respectively).  They studied the impact of the New Deal with an equilibrium model  …not big fans: How Government Prolonged the Depression.

Note: This alert is not on tomorrow’s quiz.  To prevent overload, I will keep WSJ Alerts to 2-3 per week.

Posted at 6:44 am

WSJ Alert 4 (335/402): 4th Qtr GDP

February 1, 2009

Real GDP contracted at a 3.8% annual rate in the fourth quarter — not as bad as the expected 5-6%, but still the largest quarterly contraction since 1982.  Here is the wrap up from Saturday’s WSJ (1/31, A1): Economy Dives as Goods Pile Up.

Last Wednesday’s FOMC statement suggests a quick turnaround is unlikely — and things could get worse before they get better:

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

Here is the entire statement for context: FOMC Statement (1/28/09)

Posted at 8:15 pm

WSJ Alert 3 (335/402): More on Stimulus

January 29, 2009

First off, I am renaming required business-press posts (“WSJ Alert” instead of “WSJ Email”). Several students were expecting emails. Sorry for the confusion.

Here is an article from today’s WSJ (A1) on the bill passed last night: House Passes Stimulus Package (WSJ). Here is a critical op-ed from today’s Washington Post by Martin Feldstein (Harvard Prof, former NBER head): Feldstein – An $800 Billion Mistake. I searched for pro-stimulus musings, without much luck! I am sure Christy Romer or Larry Summers will pen something for the Administration soon. In the meantime, so you won’t think I am out to indoctrinate, here is a “Letter to the Editor” from yesterday’s WSJ by Alex Field, a respected macroeconomic historian (and New Keynesian) at Santa Clara University:

What John Maynard Keynes argued, and what the experience of World War II showed, was that when an economy is well below potential output, large scale government spending can bring it to full employment very quickly. Ideally, if the spending is well chosen, it will increase aggregate supply. But even if it does not, the effect on aggregate demand can be beneficial. The principles needed to analyze a severely depressed economy differ from those that apply to one fully employed, and the policies one recommends may well be the opposite of those one would counsel to foster long run economic growth.

The larger point, to many Keynesians, is the irrelevance of the contents of the package. Government spending on anything will increase aggregate demand, thereby boosting output and employment. Here is the Master himself from The General Theory:

…Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.

It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly “wasteful” forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict “business” principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

…Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible… (MDV Note: Last sentence intended to be sarcastic.)

Here is a link to the whole chapter, if you want context: Keynes (GT) – Chapter 10. Here is a link to the entire book: Keynes – General Theory. (Note: You are not responsible for anything more than excerpt above. Consider GT links “Further Study.”)

Last point (more “Further Study” stuff): In 402 (pm), I noted the New Keynesian tent was big – indeed so big it includes Greg Mankiw (another Harvard prof, served President Bush as Chair of the Council of Economic Advisors) and Paul Krugman (certified President Bush loather). Both went to MIT. In his blog, Mankiw muses on why they went separate directions: Mankiw on Krugman.

Posted at 9:45 pm

WSJ Alert 2 (335/402): Krugman replies to Barro

January 26, 2009

Sometimes WSJ emails will technically not be about WSJ articles.  This is one of those cases.  Paul Krugman – Princeton economist, Nobel Laureate, and New York Times columnist – posted a reply to Barro’s op-ed on his blog (22nd).  He notes Barro’s argument implicitly assumes full employment (b/c Barro is an equilibrium economist).   In a Keynesian world (i.e., with less than full employment), Krugman argues, you get a different outcome.  Here is the link: Krugman on Barro.

Goes to my point in class — in macro theory these days, everything old is new again.  The same arguments are flying that flew in the 1930s.  Krugman continues the assault with a post on the 23rd.  You can read it by clicking on the Krugman blog link under “Favorite Econ Blogs.”

Posted by MDV at 6:45 pm

WSJ Alert 1 (335/402): Barro on Stimulus Package

January 24, 2009

Thursday’s WSJ (page A17) featured an op-ed by Robert Barro (author of the principal text in 402) expressing skepticism about the efficacy of stimulus packages.  Here is the link: Barro on Stimulus.  For those not yet receiving a paper, here is a pdf: barro-on-stimulus.

In the essay (which, in my opinion as a professional economist, is forceful), Barro does make a mistake.  Specifically, he says:

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall.

First, Keynes did argue wages (and hence prices) were sticky but went on to note flexibility (or expansionary monetary policy) would not necessarily restore full employment.   Here are his exact words from the General Theory:

There is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment; — any more than for the belief than an open-market monetary policy is capable, unaided, of achieving this result. The economic system cannot be made self-adjusting along these lines.

For context, here is the relevant chapter: Keynes (GT) – Chapter 19.

Second, Keynes went on to sharpen his argument that monetary policy might not work in deep recessions.  It might not, he asserted, because “liquidity preference was absolute.”  He meant uncertainty/panic would lead everyone to horde money because it is a perfectly liquid asset on which one could not suffer a capital loss.  So, by Keynes’s reasoning, if the central bank increased the money supply, interest rates would not fall (and investment would not increase), because the public would just passively accept all the new money created.  Here are his exact words from the General Theory:

There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.

Keynes did go on to concede such “liquidity traps” are rare — so rare he could not think of an example.  Still, he felt they were another reason to believe a depressed economy would not right itself (i.e., falling wages/prices increase the real money supply and so analytically are similar to expansionary monetary policy).   For context, here is the relevant chapter: Keynes (GT) – Chapter 15

Now, in Barro’s defense, Keynes’s followers modified his model, so (1) the key problem was sticky wages/prices and (2) that problem could be addressed effectively by expansionary monetary policy.  But my point is Barro is ascribing views to Keynes that more properly belong to his intellectual descendants.  (By the way, the modified version of Keynes’s model was called the “Neoclassical Synthesis;” Keynes’s most ardent disciples have dismissed this model as “Bastard” Keynesianism.)

This might seem like nitpicking, but there are economists today – Paul Krugman, for example – who doubt Fed interest-rate cuts will stimulate the economy because of a liquidity trap.   Krugman may have a point.  Depository institutions are currently holding nearly $800 billion in excess reserves.  Prior to the financial crisis, excess-reserve holdings averaged below $10 billion (constant December 2008 dollars).  And even at the height of the Great Depression, banks held under $100 billion in excess reserves (constant 2008 dollars).

REMINDER: Articles and supporting discussion in WSJ emails are fair game for quizzes and exams.

Posted by MDV at 12:14 pm (EST)