Archive for January 12th, 2009

Bhagwati does not like Obama’s policies

January 12, 2009

Jagdish Bhagwati in his new article criticises Obama’s polices and does not like the members of his team as well. He deems the team as not being comfortable with the idea of free trade.

In this column Jagdish Bhagwati sounds the alarm on Obama’s eloquent silence on key trade issues and his failure to balance his protectionist appointments with powerful trade proponents that would produce a “team of rivals”. Multilateral free trade is being dangerously let down.

This is interesting as the entire world is pretty hopeful over Obama’s plan. As Acemoglu says, policies must ensure free trade and spirit of markets survive. Huge tasks ahead for Obama.

Acemoglu takes a dig at Greenspan and raises policy conerns

January 12, 2009

Simon Johnson in his Baseline Scenario Blog pointed a new paper from Daron Acemoglu. (ME is a big fan of Acemoglu but this crisis has shifted focus quite a bit; his papers and very extensive & require a lot of time).

In this paper he says crisis policies should be framed keeping long-term growth in mind.

I would like to argue that several economic principles related to the most important aspect of economic performance, the long-run growth potential of nations, are still valid and hold important lessons in our intellectual and practical deliberations on policy. But, curiously, these principles have played little role in recent academic debates and have been entirely absent in policy debates. As academic economists, it is these principles and the implications of current policies for the growth potential of the global economy that we should be reminding policymakers of.

 He points to 3 reasons for this crisis – 1) great moderation, 2) capitalist economy can function with markets and doesn’t need institutions, 3) we can trust the large firms to monitor themselves because of reputational capital.

On his 2nd reason he takes a dig at Greenspan:

In our obliviousness to the importance of market-supporting institutions we were in sync with policymakers. They were lured by ideological notions derived from Ayn Rand novels rather than economic theory. And we let their policies and  rhetoric set the agenda for our thinking about the world and worse, perhaps,even for our policy advice. In hindsight, we should not be surprised that unregulated profit-seeking individuals have taken risks from which they benefit and others lose.

:-) Most would have got the connection. Those who haven’t, Alan Greenspan is a well- known member of Ayn Rand Club that believes in free-markets. He says:

Forgetting the institutional foundations of markets, we mistakenly equated free markets with unregulated markets. Although we understand that even unfettered competitive markets are based on a set of laws and institutions that secure property rights, ensure enforcement of contracts, and regulate firm behavior and product and service quality, we increasingly abstracted from the role of institutions and regulations supporting market transactions in our conceptualization of markets.

I have said numeorus times that financial regulation is not really understood. We just don’t understand that we live in a highly regulated world. Same can be applied to financial sector as well but we just don’t progress enough on this issue.

Acemoglu also points to the narrowness of the institutions approach:

Sure enough institutions have received more attention over the past 15 years or so than before, but the thinking was that we had to study the role of institutions to understand why poor nations were poor, not to probe the nature of the institutions that ensured continued prosperity in the advanced nations and how they should change in the face of ever evolving economic relations.

This deserves a smile as well :-) After years of lecturing emerging markets on generating and sustaining growth, the advanced ecnomies need a lesson on sustainance too.

The paper then talks about how policy responses should not be that they lead to increasing protection in world trade and backlash against free markets. It is still our best hope with proper institutions in place.

Excellent as usual.

Christina Romer advocates monetary stimulus in research and fiscal stimulus in policy

January 12, 2009

 I am still reading this much discussed research by Christina Romer and Jared Bernstein where they estimate the impact of Obama plan (Econbrowser has a nice graph which explains the impact in a nutshell). Both head Council of Economic Advisors of President elect Obama, so it is a must read. Another thing to read is CBO’s estimate of the US economy (I will try and do a comparison later on; for insights read Krugman’s blog).

Coming back to Romer/Bernstein estimation, NYT points:

Christina Romer, whom Mr. Obama has designated to be his chief economist, concluded in research she helped write in 1994 that interest-rate policy is the most powerful force in economic recoveries and that fiscal stimulus generally acts too slowly to be of much help in pulling the economy out of recessions, though associates said she now supports a big stimulus package if policy makers roll it out early enough in the recession.

This is so true. The article refers to this paper (it is a paid paper; i am unable to locate a free version) from C.Romer:

This paper examines the role of aggregate demand stimulus in ending the Great Depression. A simple calculation indicates that nearly all of the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. Huge gold inflows in the mid- and late-1930s swelled the U.S. money stock and appear to have stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. The finding that monetary developments were crucial to the recovery implies that self-correction played little role in the growth of real output between 1933 and 1942.

(emphasis is mine)

Now, this crisis is still not as bad as 1980 crisis or 1945 crisis and we are still far away from Great Depression figures. And as per Romer monetary stimulus alone was enough to get US economy out of great depression. This point has been raised by Friedman and Bernanke as well- monetary policy is what led to Great Depression in US (Bernanke’s speech sums it up) and monetary policy is what led to a recovery (Romer’s paper; I am still reading on what ended Great Depression and there is wide disparity – read Ohanian’s views as well; It is for no reason that Bernanke calls  it the holy grail of macroeconomics)

 So, what makes Romer do the flip and support the fiscal stimulus? And that too with Bernanke at the helm who knows quite a bit of what all this is about? Fed and Bernanke have reiterated that Fed has the tools and Fed has been quite aggressive as well. So, does Romer (and her team) believe Fed would not be able to get the desired results as the crisis is expected to be more severe? Or does she believe that both fiscal and monetary stimulus would be needed. Eitherways you look at it it is a flip which needs to be explained.

All this takes me to Niranjan’s blogpost (also read ME comments on the post). Niranjan pointed that despite Raghu Rajan’s research showing financial markets are not what they are made out to be, he has different ideas for India. Why should this be? Is it the case that though their research points out something, economists’ policy prescription is different? Why should this flip be? I have read Raghu Rajan’s prescription for India and was surprised not to find his paper being mentioned anywhere. The financial sector reforms are for a longer run and one should also be advising the policymakers on how to mitigate the same excesses he saw in developed financial markets.

On similar lines why can’t Romer simply say Fed is the best way out. Puzzling and interesting indeed.

Assorted Links

January 12, 2009

1. Krugman points to Romer/Bernstein evaluation of Obama plan. Though, he is not sure how the plan will work. Mankiw on the plan as well

2. Krugman also raises huge deflationary concerns in US.

3. WSJ Blog on unemployment.  It also points unemployment is worst since 1945. Urbanomics has a nice post on US unemployment as well.

4. CBB points a reality check on random evaluation.

5. TTR points to some nasty comments on Satyam’s independent directors

6. ACB revisits a classic debate -Should India choose a presidential form of government?

7. Urbanomics points McD and Walmart are the only 2 companies in Dow Jones Indes to rise in 2008.

8. FCB has a nice take on forecasting

9. CTB points exports continue to fall from a cliff. It also points to an excellent cartoon explaining crisis and bailouts


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