Market Logic

Is there a monetary solution to a structural problem?

Posted in economics, macroeconomics, monetary econ by mktlogic on March 12, 2011

Arnold Kling does a pretty good job summing up the monetary economics of Scott Sumner and John Taylor here. It’s a choice between more wrong and less wrong. As I comented there,

Sumner’s view seems to be that the damage of the recession is optional. It isn’t.

For the better part of a decade labor, capital and loanable funds were consumed in producing houses that turned out to be worth less than the economic costs of producing them. No monetary rule or NGDP target will ever change the fact that the resources consumed in the housing sector have already been consumed. A NGDP target might well have prolonged the illusion that all of the homebuilding was actually an efficient use of resources and made things worse.

Employment won’t return until people identify new projects to invest in, but that’s not something that can be helped by boosting NGDP either. It just makes it harder for people to identify profitable projects when the monetary policy further distorts relative prices. A Taylor rule approach would be less bad, since it would call for less debasement but an even better approach would be no debasement.


Distinguishing structural from cyclical unemplyoment

Posted in economics, macroeconomics by mktlogic on April 18, 2010

Christina Romer’s recent comments are somewhat troubling.

Romer writes,

” I find it distressing that some observers talk about unemployment remaining high for an extended period with resignation, rather than with a sense of urgency to find ways to address the problem. Behind this fatalism, there seems to be a view that perhaps the high unemployment reflects structural changes or other factors not easily amenable to correction. High unemployment in this view is simply “the new normal.” I disagree.

Deficient Aggregate Demand Is Key. The high unemployment that the United States is experiencing reflects a severe shortfall of aggregate demand. Despite three quarters of growth, real GDP is approximately 6 percent below its trend path.”

Romer goes on to argue, based on something like Okun’s law, that because the current unemployment rate and growth in GDP (measured as income) are consistent with a historical relationship between unemployment and GDP (measured as output), current unemployment is best attributed to cyclical factors.

Some problems with this line of reasoning: First, it’s an incomplete argument to estimate the relationship between unemployment and output growth and then cite current period values of these variables as evidence against structural employment. It may well be the case that the existing relationship was observed in periods were employment problems were structural. Romer seems to take it as given that the sample period used to determine the “normal” relationship between unemployment and GDP growth was characterized by purely cyclical employment effects.

Beyond that, Romer misses the relevant problems of observational equivalence here. Here’s a simple analogy: If consumers want apple pies but producers gear up to make cream pies instead, apple growers will soon be converting their orchards to grazing fields to fulfill the sudden increase in orders for dairy cream to be sent to bakers. Workers who might have gone into botany will go into veterinary medicine to satisfy the demand for large animal veterinarians. Once the cream pies hit the market, they will be received poorly by consumers and there will be a surplus of pies. Dairies will lay off workers to cope with falling revenues. To an aggregate demand theorist, this purely structural episode will looks like a case of declining aggregate demand. And there is a reason for that: To an aggregate demand believer, everything looks like a case of fluctuating aggregate demand.

This is the ultimate problem with aggregate demand theories of macroeconomic fluctuations. They provide no way of distinguishing between changes caused by declining aggregate demand and changes caused by supply side errors.

Another Great Depression would be cheaper

Posted in economics, macroeconomics by mktlogic on March 31, 2009

From Bloomberg: Financial Rescue Nears GDP as Pledges Top $12.8 Trillion. The article includes an itemized list.

                                  --- Amounts (Billions)---
                                   Limit          Current
Total                            $12,798.14     $4,169.71
 Federal Reserve Total            $7,765.64     $1,678.71
  Primary Credit Discount           $110.74        $61.31
  Secondary Credit                    $0.19         $1.00
  Primary dealer and others         $147.00        $20.18
  ABCP Liquidity                    $152.11         $6.85
  AIG Credit                         $60.00        $43.19
  Net Portfolio CP Funding        $1,800.00       $241.31
  Maiden Lane (Bear Stearns)         $29.50        $28.82
  Maiden Lane II  (AIG)              $22.50        $18.54
  Maiden Lane III (AIG)              $30.00        $24.04
  Term Securities Lending           $250.00        $88.55
  Term Auction Facility             $900.00       $468.59
  Securities lending overnight       $10.00         $4.41
  Term Asset-Backed Loan Facility   $900.00         $4.71
  Currency Swaps/Other Assets       $606.00       $377.87
  MMIFF                             $540.00         $0.00
  GSE Debt Purchases                $600.00        $50.39
  GSE Mortgage-Backed Securities  $1,000.00       $236.16
  Citigroup Bailout Fed Portion     $220.40         $0.00
  Bank of America Bailout            $87.20         $0.00
  Commitment to Buy Treasuries      $300.00         $7.50
  FDIC Total                      $2,038.50       $357.50
   Public-Private Investment*       $500.00          0.00
   FDIC Liquidity Guarantees      $1,400.00       $316.50
   GE                               $126.00        $41.00
   Citigroup Bailout FDIC            $10.00         $0.00
   Bank of America Bailout FDIC       $2.50         $0.00
 Treasury Total                   $2,694.00     $1,833.50
  TARP                              $700.00       $599.50
  Tax Break for Banks                $29.00        $29.00
  Stimulus Package (Bush)           $168.00       $168.00
  Stimulus II (Obama)               $787.00       $787.00
  Treasury Exchange Stabilization    $50.00        $50.00
  Student Loan Purchases             $60.00         $0.00
  Support for Fannie/Freddie        $400.00       $200.00
  Line of Credit for FDIC*          $500.00         $0.00
HUD Total                           $300.00       $300.00
  Hope for Homeowners FHA           $300.00       $300.00
The FDIC’s commitment to guarantee lending under the
Legacy Loan Program and the Legacy Asset Program includes a 
$500 billion line of credit from the U.S. Treasury.

I wonder what Bernanke, Geitherner et al are using as their estimated decline in GDP under the scenario of no policy response.

There was no credit crunch

Posted in economics, macroeconomics by mktlogic on March 27, 2009

The economic crisis may have been the result of any number of factors, but the frequently cited “credit crunch” narrative doesn’t square with reality.  Bank credit never stopped growing.  The following graphs from the Fed give year-on-year percent changes in total loans and leases at commercial banks, total bank credit and total real estate loans.  Whatever the causes of the current crisis may have been, it’s hard to believe that declining availability of credit was among them.