Paul Krugman is still upset over the decision by Switzerland’s central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don’t share his anger, perhaps it worth explaining the difference in views.
Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland’s economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)
Krugman may well be right about the reasons that Switzerland’s central bank abandoned its peg, but that doesn’t mean that it was wrong to do so.
Switzerland’s peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland’s growth is a direct subtraction from the growth of its trading partners.
This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?
Krugman’s argument rests largely on the idea that we need to promote central bank credibility. I’m a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.
I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.
For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won’t let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.
I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.
Paul Krugman is still upset over the decision by Switzerland’s central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don’t share his anger, perhaps it worth explaining the difference in views.
Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland’s economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)
Krugman may well be right about the reasons that Switzerland’s central bank abandoned its peg, but that doesn’t mean that it was wrong to do so.
Switzerland’s peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland’s growth is a direct subtraction from the growth of its trading partners.
This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?
Krugman’s argument rests largely on the idea that we need to promote central bank credibility. I’m a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.
I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.
For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won’t let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.
I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.
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A Washington Post article on President Obama’s new willingness to push an economic agenda contrasted U.S. economic performance with “the anemic economies of Europe and Japan.” It’s not clear on what basis Japan’s economy is supposed to be anemic compared with the U.S.
Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.
It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.
A Washington Post article on President Obama’s new willingness to push an economic agenda contrasted U.S. economic performance with “the anemic economies of Europe and Japan.” It’s not clear on what basis Japan’s economy is supposed to be anemic compared with the U.S.
Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.
It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.
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It isn’t often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.
While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.
In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.
So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ….)
It isn’t often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.
While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.
In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.
So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ….)
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The NYT has somehow decided that Japan needs budget discipline. It’s not clear what the basis for this determination is, but the fourth paragraph of an article on Japan’s latest budget proposal told readers:
“With the budget proposal, Japan is trying to balance its need for growth and discipline.”
The markets apparently do not see the same need as the NYT. The current interest rate on 10-year government bonds is 0.25 percent.
The NYT has somehow decided that Japan needs budget discipline. It’s not clear what the basis for this determination is, but the fourth paragraph of an article on Japan’s latest budget proposal told readers:
“With the budget proposal, Japan is trying to balance its need for growth and discipline.”
The markets apparently do not see the same need as the NYT. The current interest rate on 10-year government bonds is 0.25 percent.
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It’s more than a bit bizarre that patent protection doesn’t get a single mention in a NYT column on “why drugs cost so much.” Of course without government granted patent monopolies the vast majority of drugs would sell for $5-$10 per prescription. And, drug companies would not have incentive to mislead the public about the safety and effectiveness of their drugs.
It’s more than a bit bizarre that patent protection doesn’t get a single mention in a NYT column on “why drugs cost so much.” Of course without government granted patent monopolies the vast majority of drugs would sell for $5-$10 per prescription. And, drug companies would not have incentive to mislead the public about the safety and effectiveness of their drugs.
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The folks setting economic policy in Europe have already inflicted massive damage on the continent, putting foreign enemies and natural disasters to shame. But the pain goes on.
The NYT reported on a preliminary ruling on the European Central Bank’s (ECB) plans to buy government bonds by one of the advocates general at the Court of Justice of the European Union. According to the piece, the ruling authorized the ECB to buy government debt, but said:
“the central bank should not buy government bonds immediately after they are issued, to allow markets to determine a price.”
The point of a bond buying program is to raise the price of bonds and push down interest rates below the market level. Also, it really doesn’t matter whether the ECB buys the bonds directly from a government or from third parties after they are issued. In both cases it would be taking possession of the same share of the stock of outstanding debt, which is the relevant factor for determining bond prices and interest rates.
Can someone buy these folks an intro econ text?
The folks setting economic policy in Europe have already inflicted massive damage on the continent, putting foreign enemies and natural disasters to shame. But the pain goes on.
The NYT reported on a preliminary ruling on the European Central Bank’s (ECB) plans to buy government bonds by one of the advocates general at the Court of Justice of the European Union. According to the piece, the ruling authorized the ECB to buy government debt, but said:
“the central bank should not buy government bonds immediately after they are issued, to allow markets to determine a price.”
The point of a bond buying program is to raise the price of bonds and push down interest rates below the market level. Also, it really doesn’t matter whether the ECB buys the bonds directly from a government or from third parties after they are issued. In both cases it would be taking possession of the same share of the stock of outstanding debt, which is the relevant factor for determining bond prices and interest rates.
Can someone buy these folks an intro econ text?
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Neil Irwin has an Upshot piece making the case for why we should expect to see wages rising soon. He noted a survey of employers showing more are planning to raise wages than in prior years. He also noted the promise by Aetna to place a floor of $16 an hour on its workers’ pay.
However the main piece of evidence is a rise in the number of job opening to a high for the recovery. While this is indeed encouraging, there are three important qualifications that deserve mention.
First, the biggest rise in openings compared with pre-recession levels are in low-paying sectors like retail and restaurant employment. This may mean some shift from these low-paying sectors to higher paying sectors, but the high-paying sectors do not appear to be having trouble getting workers. One exception is the government sector, which has also returned to pre-recession levels of openings. This could reflect the deterioration in the pay and work conditions of government employees.
A second fact worth noting is that real wages were rising very modestly even before the recession. The last time we saw strong real wage growth was at the very beginning of the decade. This series began in December of 2000, just before the 2001 recession kicked in. But the job opening rate was higher in the three months preceeding the recession than the number released by the Labor Department this week, 3.6 percent in 2001 compared to 3.4 percent in November.
Finally, the quit rate at 1.9 percent is below the 2.1-2.2 percent pre-recession level and well below the 2.5 percent rate of 2000-2001. This means that workers still do not feel comfortable leaving their jobs.
Clearly the labor market is improving, but we likely still have a long way to go before most workers see real wage gains. The one wild card is that the Affordable Care Act, by allowing workers to get insurance outside of employment, may make workers more comfortable leaving jobs they don’t like. This could lead the labor market to tighten up more quickly than otherwise would have been the case.
Neil Irwin has an Upshot piece making the case for why we should expect to see wages rising soon. He noted a survey of employers showing more are planning to raise wages than in prior years. He also noted the promise by Aetna to place a floor of $16 an hour on its workers’ pay.
However the main piece of evidence is a rise in the number of job opening to a high for the recovery. While this is indeed encouraging, there are three important qualifications that deserve mention.
First, the biggest rise in openings compared with pre-recession levels are in low-paying sectors like retail and restaurant employment. This may mean some shift from these low-paying sectors to higher paying sectors, but the high-paying sectors do not appear to be having trouble getting workers. One exception is the government sector, which has also returned to pre-recession levels of openings. This could reflect the deterioration in the pay and work conditions of government employees.
A second fact worth noting is that real wages were rising very modestly even before the recession. The last time we saw strong real wage growth was at the very beginning of the decade. This series began in December of 2000, just before the 2001 recession kicked in. But the job opening rate was higher in the three months preceeding the recession than the number released by the Labor Department this week, 3.6 percent in 2001 compared to 3.4 percent in November.
Finally, the quit rate at 1.9 percent is below the 2.1-2.2 percent pre-recession level and well below the 2.5 percent rate of 2000-2001. This means that workers still do not feel comfortable leaving their jobs.
Clearly the labor market is improving, but we likely still have a long way to go before most workers see real wage gains. The one wild card is that the Affordable Care Act, by allowing workers to get insurance outside of employment, may make workers more comfortable leaving jobs they don’t like. This could lead the labor market to tighten up more quickly than otherwise would have been the case.
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The NYT reported on the likelihood of a settlement between Standard and Poors and the Justice Department over accusations that S.&P. had effectively sold investment grade ratings to banks issuing mortgage backed securities (MBS) during the housing bubble years. The claim is that S.&P. knowingly gave ratings to MBS that they did not deserve because rating these issues was a major source of revenue to the company and it did not want to risk the business by giving out honest ratings.
This is a good time to mention the Franken Amendment to the Dodd-Frank bill which would have eliminated the incentive for the rating agencies to exaggerate the quality of MBS by taking the hiring decision away from the banks. Instead of directly hiring a rating agency, an issuer of MBS would contact the SEC, which would then determine which rating agency to assign to the job. While the amendment passed with overwhelming and bi-partisan support in the Senate, it was stripped out in the conference committee, apparently at the request of the Obama administration.
The Securities and Exchange Commission (SEC) then studied the issue for three years and decided that it was not up to the task of picking rating agencies after being inundated with comments from the industry. The gist of these comments was that the SEC might send over an agency that was not competent to rate the bond issue in question. This begs the obvious question of why would any bank be marketing a bond, the quality of which a professional auditor at one of the accredited rating agencies could not accurately assess? Nonetheless the amendment was killed and the pre-crisis system was preserved intact.
And, as economic theory would predict, there is evidence that the rating agencies are again lowering their standards to gain business.
The NYT reported on the likelihood of a settlement between Standard and Poors and the Justice Department over accusations that S.&P. had effectively sold investment grade ratings to banks issuing mortgage backed securities (MBS) during the housing bubble years. The claim is that S.&P. knowingly gave ratings to MBS that they did not deserve because rating these issues was a major source of revenue to the company and it did not want to risk the business by giving out honest ratings.
This is a good time to mention the Franken Amendment to the Dodd-Frank bill which would have eliminated the incentive for the rating agencies to exaggerate the quality of MBS by taking the hiring decision away from the banks. Instead of directly hiring a rating agency, an issuer of MBS would contact the SEC, which would then determine which rating agency to assign to the job. While the amendment passed with overwhelming and bi-partisan support in the Senate, it was stripped out in the conference committee, apparently at the request of the Obama administration.
The Securities and Exchange Commission (SEC) then studied the issue for three years and decided that it was not up to the task of picking rating agencies after being inundated with comments from the industry. The gist of these comments was that the SEC might send over an agency that was not competent to rate the bond issue in question. This begs the obvious question of why would any bank be marketing a bond, the quality of which a professional auditor at one of the accredited rating agencies could not accurately assess? Nonetheless the amendment was killed and the pre-crisis system was preserved intact.
And, as economic theory would predict, there is evidence that the rating agencies are again lowering their standards to gain business.
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In a Wonkblog piece Max Ehrenfreund wrongly described the Democrats proposal for a financial transactions tax as a major tax increase on investors. This is not true. Research shows that trading volume will decline roughly in proportion to the increase in transactions costs that result from this tax.
This means that if the tax increases trading costs by 50 percent, we would expect trading volume to decline by roughly 50 percent. This means that investors might pay 50 percent more for each trade, but since they only trade half as much, the total amount they spend on trading costs would be little affected. The cost of the tax would be borne almost entirely by the financial industry, not investors.
In a Wonkblog piece Max Ehrenfreund wrongly described the Democrats proposal for a financial transactions tax as a major tax increase on investors. This is not true. Research shows that trading volume will decline roughly in proportion to the increase in transactions costs that result from this tax.
This means that if the tax increases trading costs by 50 percent, we would expect trading volume to decline by roughly 50 percent. This means that investors might pay 50 percent more for each trade, but since they only trade half as much, the total amount they spend on trading costs would be little affected. The cost of the tax would be borne almost entirely by the financial industry, not investors.
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The Washington Post reports that the Democrats have a new plan for middle class tax cuts that will be financed in part by a 0.1 percent tax on financial transactions like stocks, bonds, and derivatives. Since the financial industry and its employees will undoubtedly be pushing tirades telling us that this tax will kill middle class savers, BTP decided to call in Mr. Arithmetic to get his assessment of the issue.
Mr. Arithmetic points out that the amount of the tax born by savers will depend in large part on their response to the tax. Since research indicates that trading volume declines roughly in proportion to the increase in trading costs, this means that ordinary savers will bear almost none of the tax.
To see this point, imagine that our middle class saver has $100,000 in a 401(k). Suppose that 20 percent of it is traded every year and that the trading costs average 0.2 percent. This means that our saver is spending $40 a year on trading costs (0.2 percent of $20,000).
With the Democrats’ proposal, trading costs will rise to 0.3 percent assuming that 100 percent of the tax is passed on in higher trading costs. (This is almost certainly an exaggeration, since the industry will probably not be able to pass the tax on in full.) If trading volume were unchanged, then this middle class saver would now pay $60 a year in trading costs (0.3 percent of $20,000).
However research shows that the folks managing the 401(k) will likely cut back their trading by roughly 50 percent in response to this 50 percent increase in trading costs. This would mean that only 10 percent of the 401(k) or $10,000 would be traded each year. In this case, the 401(k) holder would be paying just $30 a year in trading costs (0.3 percent of $10,000).
Instead of going up, trading costs actually fell. Since 401(k) holders don’t on average make money on trading (for every winner there is a loser), they end up better off after the tax. Of course these numbers are approximations and it may well be the case that the decline in trading volume does not fully offset the increase in costs, but the point remains. The vast majority of this tax will fall on the financial industry (think Lloyd Blankfein, Jamie Dimon, and Robert Rubin). The middle class 401(k) holder will be largely unaffected.
The Washington Post reports that the Democrats have a new plan for middle class tax cuts that will be financed in part by a 0.1 percent tax on financial transactions like stocks, bonds, and derivatives. Since the financial industry and its employees will undoubtedly be pushing tirades telling us that this tax will kill middle class savers, BTP decided to call in Mr. Arithmetic to get his assessment of the issue.
Mr. Arithmetic points out that the amount of the tax born by savers will depend in large part on their response to the tax. Since research indicates that trading volume declines roughly in proportion to the increase in trading costs, this means that ordinary savers will bear almost none of the tax.
To see this point, imagine that our middle class saver has $100,000 in a 401(k). Suppose that 20 percent of it is traded every year and that the trading costs average 0.2 percent. This means that our saver is spending $40 a year on trading costs (0.2 percent of $20,000).
With the Democrats’ proposal, trading costs will rise to 0.3 percent assuming that 100 percent of the tax is passed on in higher trading costs. (This is almost certainly an exaggeration, since the industry will probably not be able to pass the tax on in full.) If trading volume were unchanged, then this middle class saver would now pay $60 a year in trading costs (0.3 percent of $20,000).
However research shows that the folks managing the 401(k) will likely cut back their trading by roughly 50 percent in response to this 50 percent increase in trading costs. This would mean that only 10 percent of the 401(k) or $10,000 would be traded each year. In this case, the 401(k) holder would be paying just $30 a year in trading costs (0.3 percent of $10,000).
Instead of going up, trading costs actually fell. Since 401(k) holders don’t on average make money on trading (for every winner there is a loser), they end up better off after the tax. Of course these numbers are approximations and it may well be the case that the decline in trading volume does not fully offset the increase in costs, but the point remains. The vast majority of this tax will fall on the financial industry (think Lloyd Blankfein, Jamie Dimon, and Robert Rubin). The middle class 401(k) holder will be largely unaffected.
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